When a company shifts from a traditional cost system in which manufacturing overhead is applied based on direct labor-hours to an activity-based costing system with batch-level and product-level costs, the unit product costs of high volume products typically decrease whereas the unit product costs of low volume products typically increase.

Question

Quizplus · Accepted Answer

Activity-based costing allocates overhead based on activities, rather than direct labor-hours, which results in more accurate cost allocation. High volume products may benefit from economies of scale, resulting in a decrease in unit product costs, whereas low volume products may have unique activities and require more resources, resulting in an increase in unit product costs.

When a Company Shifts from a Traditional Cost System in Which