Answer the following questions using the information below:
Products S5 and CP8 each are assigned $100.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less setup time than CP8.
-According to an ABC system,CP8 is ________ under the traditional system.
A) undercosted
B) overcosted
C) fairly costed
D) accurately costed

Question

Quizplus · Accepted Answer

Since CP8 and S5 have identical production requirements but CP8 has a longer setup time, it can be inferred that CP8 is overcosted in the traditional costing system. ABC system considers setup time as an activity-based cost driver, which means that the more setup time required for a product, the more indirect costs it should bear. Therefore, in the ABC system, CP8 would be assigned a higher indirect cost, and it was undercosted in the traditional system.

Answer the Following Questions Using the Information Below