Johnson Superior Products Inc. produces hospital equipment and the setup requirements vary from product to product. Johnson produces its products based on customer orders and uses ABC costing. In one of its indirect cost pools, setup costs and distribution costs are pooled together. Costs in this pool are allocated using number of customer orders for the easiness of costing operations. Based on the information provided, which of the following arguments is valid?

Question

Quizplus · Accepted Answer

Setup costs and distribution costs likely have different cost drivers; using the number of customer orders may not accurately reflect the cause-and-effect relationship for setup costs, suggesting that a more appropriate cost driver should be used for these activities.