Smith Company has developed the following information about two products:
$\begin{array}{lll}& \text { Cost Per Unit } & \text { Cost Per Unit } \
\text { Approach } & \text { Product 1 } & \text { Product 2 } \
\text { Traditional } & \$ 5,400 & \$ 2,500 \
\mathrm{ABC} & \$ 6,000 & \$ 2,400
\end{array}$
If managers believe the ABC approach is more accurate to cost products than the traditional approach,then ________.
A) the traditional approach underestimates the profitability of Product 1 and overestimates the profitability of Product 2
B) the traditional approach overestimates the profitability of Product 1 and underestimates the profitability of Product 2
C) the ABC approach underestimates the profitability of Product 1 and overestimates the profitability of Product 2
D) the ABC approach overestimates the profitability of Product 1 and underestimates the profitability of Product 2

Question

Smith Company has developed the following information about two products:
$\begin{array}{lll}& \text { Cost Per Unit } & \text { Cost Per Unit } \
\text { Approach }  & \text { Product 1 } & \text { Product 2 } \
\text { Traditional } & \$ 5,400 & \$ 2,500 \
\mathrm{ABC} & \$ 6,000 & \$ 2,400
\end{array}$
If managers believe the ABC approach is more accurate to cost products than the traditional approach,then ________.
A) the traditional approach underestimates the profitability of Product 1 and overestimates the profitability of Product 2
B) the traditional approach overestimates the profitability of Product 1 and underestimates the profitability of Product 2
C) the ABC approach underestimates the profitability of Product 1 and overestimates the profitability of Product 2
D) the ABC approach overestimates the profitability of Product 1 and underestimates the profitability of Product 2

Quizplus · Accepted Answer

The ABC (Activity-Based Costing) approach assigns costs to Product 1 as $6,000, which is higher than the traditional approach's $5,400, indicating the traditional approach undercosts Product 1, potentially overestimating its profitability. For Product 2, the ABC approach assigns costs as $2,400, lower than the traditional approach's $2,500, indicating the traditional approach overcosts Product 2, potentially underestimating its profitability.

Smith Company Has Developed the Following Information About Two Products