Question

Products X and Y are assigned $100.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, X requires 45 minutes less setup time than Y. According to an ABC system, Y is _________ under the traditional system.

1) Undercosted
2) Overcosted
3) Fairly costed
4) Accurately costed

Answer 1

According to the activity-based costing (ABC) system, if Product Y requires 45 minutes less setup time than Product X but both are assigned the same $100.00 in indirect costs under the traditional costing system, then Product Y is overcosted. Hence, the correct answer is option (2).

Step-by-step explanation:

According to the information given, the traditional costing system assigns $100.00 in indirect costs to both products X and Y. However, an activity analysis revealed that X requires 45 minutes less setup time than Y, indicating that Y is overcosted under the traditional system.

In an ABC system, costs are allocated based on activities, and in this case, the setup time is a relevant activity that affects the cost. Since Product Y requires less setup time but is assigned the same indirect costs as Product X under the traditional system, it suggests that Product Y is overcosted in the traditional costing system.