An organization currently employs traditional costing for its cost accounting functions. They have computed the following unit costs for two of their current products: Salt, $0.33 per unit; and Pepper, $0.40 per unit. If they were instead using Activity-Based Costing (ABC), then it would have resulted in the following unit costs: Salt, $0.36 per unit; and Pepper, $0.37 per unit. Which of the following statements is correct?
A) As compared to ABC, the profit of pepper will be overstated under traditional costing.
B) As compared to ABC, the profit of salt will be overstated under traditional costing.
C) As compared to traditional costing, the profit of pepper will be understated under ABC.
D) As compared to traditional costing, the profit of salt will be overstated under ABC.

Question

Quizplus · Accepted Answer

This question requires you to consider how per-unit cost will impact profit under each type of product costing. Choice B is accurate because traditional costing will lead to a lower unit cost and therefore higher or overstated profit for salt.

An Organization Currently Employs Traditional Costing for Its Cost Accounting