Ted's Manufacturing makes two products, B and C. They each take 2 direct labor hours and 2 machine hours to produce. A batch of Product B, however, uses twice the number of machine set-ups and requires 3 times as many materials requisitions as does Product C. Which of the following is most likely true?
A) The product cost of Product C will be higher under ABC than under traditional costing
B) Traditional costing assigns a product cost that is too low to Product B
C) Traditional costing assigns a product cost that is too low to Product C
D) The product cost of Product B will be higher under ABC than under traditional costing

Question

Quizplus · Accepted Answer

Traditional costing assigns overhead costs based on a single cost driver, such as direct labor hours or machine hours. This can lead to inaccurate product costs, especially when products have different levels of resource consumption. In this case, Product B uses more machine set-ups and materials requisitions than Product C, but traditional costing would assign the same amount of overhead costs to both products. This would result in Product B having a lower product cost than Product C, which is not accurate.

Ted's Manufacturing Makes Two Products, B and C