Final answer:
Overhead costs shift to low-volume premium products in activity-based costing because these products typically require more costly activities per unit compared to high-volume standard products. This allocation method accounts for the specific activities associated with each product, resulting in a more accurate distribution of overhead costs.
Step-by-step explanation:
In changing from a traditional costing system to activity-based costing system, overhead costs tend to shift from high-volume standard products to low-volume premium products because premium products usually consume more activities per unit than standard products. While traditional costing methods allocate overhead on a volume basis, such as labor hours or machine hours which tends to favor high-volume products, activity-based costing allocates costs more accurately based on the actual activities required for each product. In an activity-based costing system, each product is charged for the specific activities it necessitates, like special handling, additional testing, or small-batch setups, which are more common with low-volume premium products. A common name for fixed cost is "overhead." For example, if fixed cost is $1,000 and this cost is spread across the quantity of output produced, the average fixed cost curve would decline as output increases. This represents the concept of "spreading the overhead", which means that the more units produced, the lower the fixed cost per unit, making larger volumes more cost-efficient regarding the fixed cost aspect.