Magnolia Industries combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Magnolia's current procedures that:
A) all of the company's products are undercosted.
B) the company's high-volume products are undercosted.
C) all of the company's products are overcosted.
D) the company's high-volume products are overcosted.
E) the company's low-volume products are overcosted.

Question

Quizplus · Accepted Answer

Activity-based costing (ABC) typically reveals that high-volume products are overcosted when a company uses a single cost pool (like machine hours) for allocating manufacturing overhead. This is because high-volume products tend to use more machine hours, leading to a higher allocation of overhead costs under traditional costing methods. ABC, by contrast, allocates costs based on multiple activities, which can show that these products are actually less costly in terms of other activities (like setup times) that are not directly related to machine hours.

Magnolia Industries Combines All Manufacturing Overhead into a Single Cost