Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 31

Why do product-costing systems using a single, volume-based cost driver tend to overcost high- volume products? Will there be any undesirable strategic effects from such product cost distortion?

Step 1 of 3

Volume Based Costing:

In volume based costing all the indirect expenses are allocated on the basis of the proportion of volume. Point to note here is that this proportion of volume can be based on direct labor, machine hour, unit of products etc.

In single volume based costing overhead expenses are allocated using a single cost driver only.