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Hello,
I recently did the Mock Exam of Performance Management and when reviewing the solutions i noticed something that might be incorrect in the answer sheet but that’s just my understanding.
The question is: “Which of the following statements About Acitivity based costing is/are correct?”
Statements to choose from:
1. “Traditional absoption costing tends to under-allocate overhead costs to low-lovume products.”
2.”A Cost driver is any factor that causes a change in the Cost of an Activity.”I chose only statement 2 to be correct and the System marked my answer as wrong stating that “Statement 1 and 2” are correct. However, in the answers’ sheet is written the below note:
“Only statement 2 is true – A Cost driver is any factor that causes a change in the Cost of an Activity.”
Could you please let me know which one is correct?
Thank you!
Both statements are true (and I will correct the note in the answer).
With traditional absorption costing, the total overheads allocated to low volume products will be low, and the total allocated to high volume products will be high.
However just because a product is low volume does not necessarily mean that the overheads involved will be low – for example, machines still need setting up for the production regardless of the number being produced.
(To illustrate what I mean, look at product C in the example that I work through in my free lecture)
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