14. Select the incorrect statement regarding the use of cost drivers in activity

Question

14.   Select the incorrect statement regarding the use of cost drivers in activity-based costing systems.

A.    ABC uses volume-based and activity-based cost drivers.

B.    Volume-based drivers are most appropriate for costs that are affected by the number of units produced.

C.    ABC's use of multiple cost drivers will produce less precise unit costs when a company produces many different products that require different types and levels of overhead costs.

D.    An arbitrary cost driver must be selected when allocating facility-level activity costs.

   15.Miller Company makes two types of chairs. One of the chairs is a rocking chair. The other is a straight-back chair. Both chairs are made by hand. Miller Company uses a company-wide overhead rate that is based on direct labor hours to assign overhead costs to the two products. If Miller automates the production of straight-back chairs and continues to use direct labor hours as a company-wide allocation basis:

A.    rocking chairs will be overcosted.

B.    straight back chairs will be overcosted.

C.    rocking chairs will be undercosted.

D.    there should be no impact on unit cost.

Explanation / Answer

The correct answer is OPTION - A that Rocking chairs will be overcosted.

This is because, when straight back chair gets automated, it will not be using as many direct labor hours as it used to be. Hence, when direct labor hours will be used to allocate fixxed overhead, Straight Baack chairs will get LESSOR cost allocated.

Rocking back chairs will however gets more allocated because of that and hence they will be OVERCOSTED.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.