Economics · Cost Accounting
Activity-Based Costing (ABC) is often used for allocating overheads. A company manufactures two products, Alpha and Beta. Product Alpha is produced in large batches, while Product Beta requires frequent setups and inspections. Traditional costing allocates overheads based on direct labor hours. If the total overhead is 6,00,000 and is split between Setup Costs (4,00,000) and Inspection Costs (2,00,000), and Product Beta accounts for 80% of the setups despite having only 20% of the labor hours, which of the following is true?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Traditional costing will over-cost Product Alpha and under-cost Product Beta.✓
- 2Traditional costing will under-cost Product Alpha and over-cost Product Beta.
- 3Activity-Based Costing will result in a lower cost for Product Beta because it is a low-volume product.
- 4The cost of Product Alpha will remain unchanged regardless of the allocation method used.
Correct answer
Traditional costing will over-cost Product Alpha and under-cost Product Beta.
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