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John Moffat.
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lokeshdh00
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In Q no. 2 of practice questions, It is shown that “Traditional costing technique causes undervalue or under-allocation to overheads of lower-volume products”
Its obvious from example one of chapter 1 that traditional costing causes under allocation of overhead but What exactly causes the under allocation is it the cost driver. I wronged only this particular question as i thought it solely depends on cost driver as you provided explanation in example 1 And if cost driver is the one which decides cost allocation then less cost driver for low volume goods should not under allocate O/Hs right in traditional methord ? and if cost driver is unreasonably high for high volume cost then it should under allocate high volume products in traditional methord, isn’t that right? can you please explain this to me.
John Moffat
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Whatever the method of absorbing overheads is, the same total overheads will be absorbed. What changes is how they are absorbed per unit into different products.
With traditional costing all units are costed using the same cost driver – usually labour hours or machine hours. And therefore the total absorbed into each product is not affected by the number produced of each product.
As shown by the examples in Chapter 1, it is likely that a product with a low level of production is actually using more of a particular cost driver and therefore should be allocated more of the overheads.
lokeshdh00
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