If substantial batch-level or product-level costs exist, then overhead allocation based on a measure of volume such as direct labor-hours alone:
A)is a key aspect of the activity-based costing model.
B)will systematically overcost high-volume products and undercost low-volume products.
C)will systematically overcost low-volume products and undercost high-volume products.
D)must be used for external financial reporting since activity-based costing cannot be used for external reporting purposes.

Question

Quizplus · Accepted Answer

Allocating overhead based solely on direct labor-hours will result in high-volume products being overcosted and low-volume products being undercosted, since substantial batch-level or product-level costs are not taken into consideration. Activity-based costing (ABC) is a better alternative for more accurate costing in situations where substantial batch-level or product-level costs exist, as it takes into account the cost drivers for each activity and assigns costs accordingly. However, while ABC may be used for internal costing and decision-making purposes, traditional costing methods may still have to be used for external financial reporting due to their simplicity and consistency.

If Substantial Batch-Level or Product-Level Costs Exist, Then Overhead Allocation