Collin Inc.produces hospital equipment and the setup requirements vary from product to product.Collin 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?
A) Collin has clearly failed to identify as many direct costs as is economically feasible.
B) All costs in a homogeneous cost pool have the same or a similar cause-and-effect relationship with the single cost driver that is used as the cost-allocation base for Collin.
C) Collin has unnecessarily wasted resources by classifying setup and distribution costs as they could have been considered as direct costs.
D) Collin has failed to use the correct cost driver as the cost-allocation base for setup costs.

Question

Quizplus · Accepted Answer

Setup costs likely have a different cost driver than the number of customer orders, indicating a potential mismatch in the allocation base.