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“Traditional absorption costing tend to allocate insufficient overhead costs to low volume products”
Sir I don’t understand the term low volume product,also don’t get the statement properly.. what if it is ABC?? how this statement will be changed for ABC?? and why…I found this type of qu in Section A several times..but failed to get the logic 🙁Suppose we make 100 units of product A and 9,900 units of product B. Total overheads are $100,000.
Using traditional costing, it would be $10 per unit, and therefore $1,000 in total would be allocated to product A.Suppose now that the overheads were the cost of setting up the machines. Product A needs 1 set-up (for the 100 units) and Product B needs 9 set ups (for the 9,900 units).
The cost per set-up is $10,000 and therefore 10,000 in total would be allocated to product A.
Traditional absorption has allocated less overheads to the low volume product.
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