Jackson Company manufactures products X and Y, applying overhead on the basis of labour hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Jackson's current accounting procedures? $\begin{array} { | l | l | l | }
\hline & { \underline { X } } & { \underline { Y } } \
\hline 1 & \text { Undercosted } & \text { Undercosted } \
\hline 2 & \text { Undercosted } & \text { Overcosted } \
\hline 3 & \text { Overcosted } & \text { Undercosied } \
\hline 4 & \text { Overcosted } & \text { Overcosted } \
\hline 5 & \text { Costed correctly } & \text { Costed correctly } \
\hline
\end{array}$
A)1.
B)2.
C)3.
D)4.
E)5.

Question

Jackson Company manufactures products X and Y, applying overhead on the basis of labour hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Jackson's current accounting procedures? $\begin{array} { | l | l | l | } 
\hline &  { \underline { X } } &  { \underline { Y } } \
\hline 1 & \text { Undercosted } & \text { Undercosted } \
\hline 2 & \text { Undercosted } & \text { Overcosted } \
\hline 3 & \text { Overcosted } & \text { Undercosied } \
\hline 4 & \text { Overcosted } & \text { Overcosted } \
\hline 5 & \text { Costed correctly } & \text { Costed correctly } \
\hline
\end{array}$
A)1.
B)2.
C)3.
D)4.
E)5.

Quizplus · Accepted Answer

Since overhead is applied on the basis of labour hours, product X, which requires a variety of complex manufacturing procedures, would likely require more labour hours than product Y, which is relatively simplistic in nature. The current accounting procedures would likely undercost product X (Choice 1 and 2 are possible) and overcost product Y (Choice 2 and 3 are possible). An activity-based costing system would likely allocate indirect costs more accurately based on the specific activities involved in producing each product, which would reveal that product X is likely more expensive to produce than the current accounting procedures suggest and product Y is likely less expensive to produce than the current accounting procedures suggest. Therefore, choice B (2) is the best choice.

Jackson Company Manufactures Products X and Y, Applying Overhead on the Basis