When a company implements activity-based costing, overhead cost often shifts from high-volume products to low-volume products, with a higher unit cost resulting for the low-volume products.

Question

Quizplus · Accepted Answer

Activity-based costing allocates overhead costs based on the activities that drive those costs. Low-volume products typically require more unique activities and resources to produce, leading to higher cost allocations and unit costs. High-volume products, on the other hand, may have more standardized processes and economies of scale that reduce their cost allocations and unit costs. Therefore, implementing activity-based costing can shift overhead costs from high-volume products to low-volume products, resulting in higher unit costs for the latter.

When a Company Implements Activity-Based Costing, Overhead Cost Often Shifts