Indicate whether each of the following statements is true or false. Use of an ac
ID: 2568468 • Letter: I
Question
Indicate whether each of the following statements is true or false.
Use of an activity-based costing system may identify products that are over cost or under cost by a traditional system. ____
Use of an activity-based costing system may prove to company managers that it is incurring losses on some products they believed to be profitable. ____
The starting point for target pricing is to determine the costs that are incurred in making the product. ____
Use of a traditional product costing system may put a company at a competitive advantage by over costing some products. ____
Activity-based costing results could lead managers of a company to decide to eliminate some products. ____
Explanation / Answer
Answer for question no.1:
True. Under traditional system only one criteria is considered for allocation of overheads, but under activity based costing each component of the overhead is allocated to the products according to the usage of the resources. Hence, this way one can ascertain whether the product is over cost or under cost.
Answer for question no.2:
True. When costs are allocated on the basis of activity based costing, the products that use the resources more are allocated more overheads, leading to the increase in costs the there by rendering those products unprofitable.
Answer for question no.3:
False. Target pricing first step is to determine the price at which the product could be sold in the market in a competitive manner.
Answer for question no.4:
False. Over costing increases the cost of the products and thereby increasing the selling price of those products, as a result the demand for the products may fall down, so, it does not provide a competitive advantage.
Answer for question no.5:
True. Under activity based costing system, the costs related to overheads are reasonably allocated to the products, hence, those products that are not yielding contribution to cover the overhead costs can be discontinued so that they do not eat into the profits generated by other products.