A company is currently using traditional costing and has arrived at the following unit costs for their two products: Caramel, $0.88 per unit; and Hot Fudge, $0.77 per unit. If they had instead used Activity-Based Costing (ABC), then it would have resulted in the following unit costs: Caramel, $0.83 per unit; and Hot Fudge, $0.82 per unit. Which of the following statements is correct?
A) The higher unit cost of caramel under traditional costing will lead to a higher profit compared to ABC.
B) The lower unit cost of hot fudge under traditional costing will lead to a lower profit compared to ABC.
C) The profit of caramel will be understated under traditional costing compared to ABC.
D) The profit of hot fudge will be overstated under ABC compared to traditional costing.

Question

Quizplus · Accepted Answer

This question requires you to consider how per-unit cost will impact profit under each type of product costing. Choice C is accurate because traditional costing will lead to a higher unit cost for caramel and therefore lower or understated profit for caramel.

A Company Is Currently Using Traditional Costing and Has Arrived