Question

1. If management wants the most accurate product cost, which of the following costing methods should be used?

1. Volume-based costing using departmental overhead rates
2. Volume-based costing using a plantwide overhead rate
3. Normal costing using a plantwide overhead rate
4. Activity-based costing

2. Which costing method tends to overstate the cost of high-volume products?

1. Traditional volume-based costing
2. Activity-based costing
3. Job order costing
4. Differential costing

3. Disadvantages of activity-based costing include

1. It is not acceptable under GAAP for external reporting management
2. It can be costly to implement.
3. It can be used activity-based.
4. Both a. and b.

Short answer

1. d. Activity-based costing
2. a. Traditional volume-based costing
3. d. Both a. and b.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of GAAP

GAAP is an acronym for "Generally Accepted Accounting Principles," a collection of accounting rules and industry practices created over time. Organizations utilize it to arrange their financial data into accounting records appropriately, summarize the accounting data into financial statements, and reveal specific supporting data.

An explanation for part (1)

The activity-based costing approachmay be a strategy for calculating the general cost of all activities required to make a product. Expenses are allowed to only a couple of things and services based on anticipated genuine use in this technique. It'll incorporate indirect costs that would something else be disregarded by other costing strategies.

Other costing methodologies, for example, could consider the entire material or machine price when estimating the overall cost of manufacturing the product, undervaluing its real cost. As a result, the activity-based costing technique will include

all costs linked to expenses that are not directly related to production, such as repairing damaged components, the cost of daily maintenance, and so on.

When management wishes to compute the most accurate product cost, activity-based costing should be applied.

An Explanation for part (2)

Traditional volume-based costingestimates all overhead costs, such as wage paid per hour to personnel, and includes them in the large-fetched production without any changes. As a result, the cost of high-volume things will be accentuated, as working longer hours does not continuously imply a commensurate gain in efficiency.

As a result, traditional volume-based costing is prone to exaggerate the cost of high-value goods.

An Explanation for part (3)

The activity cost technique has a few drawbacks:

GAAP (generally accepted accounting principles) does not recognize ABC Methodbecause it ignores the organization's sustaining expenses, which will continue to exist regardless of how many goods the firm produces. (For instance, the cost of factory security, the cost of electricity for heating and cooling, and the cost of office administrative rent.)

It's an expensive endeavor since it necessitates a more exact method of calculating indirect expenses. The company will need to engage additional experts to pay close attention to indirect expenses typically overlooked by regular employees while analyzing data.