Cost Accounting Quiz: Traditional Vs Abc Costing
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Traditional Vs Abc CostingQuestion 1 of 20

After implementing an activity-based costing system, Sentinel Corp. discovered that the manufacturing cost of its specialized product, the S-Pro, increased by 35% compared to the previous traditional system which used machine hours as the plant-wide allocation base.

Which of the following is the most probable cause for the significant increase in the S-Pro's reported cost under the ABC system?

The S-Pro has a higher direct material and direct labor cost than Sentinel's other products.
The total manufacturing overhead of Sentinel Corp. increased during the period of the costing system change.
The S-Pro requires a disproportionately high level of batch-level and product-sustaining activities relative to its machine hour consumption.
The traditional system's use of machine hours was an inappropriate choice, and direct labor hours should have been used instead.
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Cost Accounting Quiz

Cost Accounting Quiz: Traditional Vs Abc Costing

Practice Traditional Vs Abc Costing in Cost Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Traditional Vs Abc Costing, giving you a quick way to practice the rules, question types, and explanations that matter most for Cost Accounting.

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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

After implementing an activity-based costing system, Sentinel Corp. discovered that the manufacturing cost of its specialized product, the S-Pro, increased by 35% compared to the previous traditional system which used machine hours as the plant-wide allocation base.

Which of the following is the most probable cause for the significant increase in the S-Pro's reported cost under the ABC system?

  1. The S-Pro has a higher direct material and direct labor cost than Sentinel's other products.
  2. The total manufacturing overhead of Sentinel Corp. increased during the period of the costing system change.
  3. The S-Pro requires a disproportionately high level of batch-level and product-sustaining activities relative to its machine hour consumption. (correct answer)
  4. The traditional system's use of machine hours was an inappropriate choice, and direct labor hours should have been used instead.
Explanation: The core principle of ABC is to trace costs to products based on their consumption of activities. If a product's cost increases significantly under ABC, it means the previous system was undercosting it. This happens when the product consumes a large amount of resources from activities not well correlated with the traditional volume-based driver (machine hours). Batch-level activities (like setups, purchasing) and product-sustaining activities (like engineering changes, special testing) are prime examples. The S-Pro, being a specialized product, likely consumes many of these resources, which ABC now correctly assigns to it.

Question 2

Flexicon Inc. produces two models of a component, a Standard model and a Custom model. Total annual overhead is $400,000, of which $100,000 is for quality inspections. Flexicon's traditional costing system allocates overhead based on a plant-wide rate using its 50,000 total machine hours (MH). The Standard model uses 40,000 MH, and the Custom model uses 10,000 MH. An ABC analysis shows that the $100,000 in quality inspection costs are driven by the number of inspections. The Standard model requires 50 inspections, while the Custom model requires 200 inspections.

Compared to the amount of quality inspection cost allocated to the Custom model under the traditional system, how much more cost from this specific activity would be allocated under an ABC system?

  1. $50,000
  2. $60,000 (correct answer)
  3. $70,000
  4. $80,000
Explanation: This multi-step question requires comparing the implicit allocation of a single activity's cost under traditional costing with its direct allocation under ABC.
  1. Traditional System Allocation:
    • Proportion of machine hours for Custom model = 10,000 MH / 50,000 MH = 20%.
    • Total overhead allocated to Custom model = 20% * $400,000 = $80,000.
    • The quality inspection cost is $100,000 out of $400,000 total OH, which is 25%.
    • Implicit inspection cost allocated to Custom = 25% of the allocated overhead = 25% * $80,000 = $20,000.
  2. ABC System Allocation:
    • Total inspections = 50 (Standard) + 200 (Custom) = 250 inspections.
    • ABC rate for inspections = $100,000 / 250 inspections = $400 per inspection.
    • Inspection cost allocated to Custom = 200 inspections * $400/inspection = $80,000.
  3. Difference:
    • The additional cost allocated under ABC is $80,000 (ABC) - $20,000 (Traditional) = $60,000.

Question 3

A company currently uses an ABC system and allocates its 600,000ofoverheadcostsusingtwopools:engineeringsupport(600,000 of overhead costs using two pools: engineering support (200,000) based on engineering hours, and machine processing ($400,000) based on machine hours. The company produces 5,000 units of Product P and 10,000 units of Product Q. Product P requires 3,000 engineering hours and 10,000 machine hours. Product Q requires 1,000 engineering hours and 30,000 machine hours.

If the company were to use a traditional costing system with machine hours as the single allocation base, the reported overhead cost per unit for Product P would be:

  1. $22 lower than the ABC cost. (correct answer)
  2. $30 lower than the ABC cost.
  3. $22 higher than the ABC cost.
  4. $30 higher than the ABC cost.
Explanation: This requires calculating the cost under both systems and comparing them.
  1. Calculate ABC Overhead Cost for Product P:
    • Total Engineering Hours = 3,000 + 1,000 = 4,000
    • Engineering Rate = $200,000 / 4,000 hours = $50 per eng. hour
    • Total Machine Hours = 10,000 + 30,000 = 40,000
    • Machine Processing Rate = $400,000 / 40,000 hours = $10 per mach. hour
    • Total ABC Overhead for P = (3,000 eng. hrs * $50) + (10,000 mach. hrs * $10) = $150,000 + $100,000 = $250,000
    • ABC Overhead per unit of P = $250,000 / 5,000 units = $50
  2. Calculate Traditional Overhead Cost for Product P:
    • Total Overhead = $600,000
    • Total Machine Hours = 40,000
    • Traditional Rate = $600,000 / 40,000 MH = $15 per MH
    • Total Traditional Overhead for P = 10,000 MH * $15/MH = $150,000
    • Traditional Overhead per unit of P = $150,000 / 5,000 units = $30
  3. Compare the Costs:
    • The traditional cost per unit ($30) is 22lowerthantheABCcostperunit(22 lower than the ABC cost per unit (50).

Question 4

A company using an activity-based costing system for its low-volume custom products and high-volume standard products invests in new flexible manufacturing technology. This technology drastically reduces the time and cost required for machine setups, a major batch-level activity.

Following this process improvement, what is the most likely effect on the product costs reported by the ABC system, assuming the system is updated?

  1. The reported costs of both custom and standard products will decrease by the same percentage.
  2. The reported cost of the custom products will decrease significantly, while the cost of standard products will be largely unaffected. (correct answer)
  3. The company should revert to a traditional costing system because the reduction in setup costs eliminates product complexity differences.
  4. The reported cost of the standard products will decrease more than the custom products because they represent a higher production volume.
Explanation: The process improvement directly reduces the cost of the setup activity. In an ABC system, this cost reduction will be reflected in a lower cost for the setup activity pool or a lower setup rate. Low-volume custom products typically require many setups relative to their volume, so they are heavy consumers of this activity. Therefore, a reduction in setup costs will disproportionately benefit the reported cost of the custom products. High-volume standard products, which require few setups, will see little to no change in their reported cost from this specific improvement.

Question 5

A company has two production departments: Machining (highly automated, high overhead) and Assembly (labor-intensive, low overhead). The company produces two products. Product X spends 80% of its production time in Machining. Product Y spends 80% of its time in Assembly. The company currently uses a single plant-wide overhead rate based on direct labor hours.

Compared to a more refined costing system like departmental rates or ABC, how does the plant-wide rate likely distort the product costs?

  1. It undercosts Product X and overcosts Product Y. (correct answer)
  2. It overcosts Product X and undercosts Product Y.
  3. It accurately costs both products because the differences in the departments average out.
  4. It undercosts both products, leading to an overstatement of total company profit.
Explanation: A plant-wide rate based on direct labor hours averages the high overhead costs of the Machining department and the low overhead costs of the Assembly department. Product X uses the expensive Machining department but incurs relatively few direct labor hours. The plant-wide rate will fail to assign the high machining costs to it, thus undercosting it. Conversely, Product Y uses the inexpensive Assembly department but incurs many direct labor hours, causing the plant-wide rate to assign it a large, and incorrect, share of the total overhead (including the expensive machining costs it barely used). This overcosts Product Y.

Question 6

A company produces Product P and Product Q. Its traditional system allocates the total overhead of 600,000basedonthe30,000totaldirectlaborhours(DLH)worked.AnABCanalysisidentifiesthreemajoractivitycostpools:Machining(600,000 based on the 30,000 total direct labor hours (DLH) worked. An ABC analysis identifies three major activity cost pools: Machining (300,000), Quality Control (200,000),andGeneralFactory(200,000), and General Factory (100,000). The Quality Control cost pool is driven by the number of inspections.

Product Q requires 1.0 DLH per unit to produce and is responsible for 75% of all quality inspections. Under the traditional costing system, what amount of the per-unit overhead cost assigned to Product Q is implicitly assumed to be for Quality Control?

  1. $6.67 (correct answer)
  2. $15.00
  3. $20.00
  4. $5.00
Explanation: This question requires calculating the portion of the traditional overhead rate that relates to a specific activity.
  1. Calculate the Traditional Overhead Rate:
    • Rate = Total Overhead / Total DLH = $600,000 / 30,000 DLH = $20 per DLH.
  2. Calculate the Total Traditional Overhead per unit of Product Q:
    • Overhead per unit = Rate * DLH per unit = $20/DLH * 1.0 DLH/unit = $20.00.
  3. Determine the Proportion of Overhead from Quality Control:
    • The Quality Control pool is $200,000 of the $600,000 total overhead.
    • Proportion = $200,000 / $600,000 = 1/3 or 33.33%.
  4. Calculate the Implicit Quality Control Cost in Product Q's traditional cost:
    • Implicit cost = Total traditional overhead per unit * Proportion from QC.
    • Implicit cost = $20.00 * (1/3) = $6.67.

Question 7

A company manufactures a high-volume standard product and a low-volume custom product. The custom product requires significant engineering support (an overhead cost), while the standard product requires none after its initial design. Both products require a similar number of machine hours per unit to manufacture.

If the company uses a traditional costing system that allocates all overhead based on machine hours, what is the most likely distortion that will occur?

  1. The custom product's reported cost will be overstated, making it appear less profitable than it is.
  2. The total company-wide cost of goods sold will be understated compared to an ABC system.
  3. Both products will be costed accurately because machine hours is a fair, volume-based measure for allocation.
  4. The standard product's reported cost will be inflated, absorbing engineering costs it does not incur. (correct answer)
Explanation: The traditional system allocates all overhead, including engineering support, based on machine hours. Since the standard product consumes machine hours but no engineering support, it will be allocated a portion of the engineering support costs. This inflates its cost and makes it appear less profitable. Conversely, the custom product, which is the sole consumer of engineering support, will not be assigned the full cost of that support, leading to an understatement of its true cost. This is a classic case of product cost cross-subsidization.

Question 8

A company is evaluating two potential new product designs. Model R is a simple design using common parts that can be produced in long, efficient runs. Model S is a complex design using many unique parts that will require frequent, specialized machine setups for production in small batches. Projections show that both models will require exactly two direct labor hours per unit to produce.

If the company uses its current traditional costing system, which allocates overhead based on direct labor hours, to evaluate the potential profitability of these models, what is the most likely outcome?

  1. The system will accurately report that Model S is more costly to produce than Model R.
  2. The choice of costing system is irrelevant to the decision because the direct labor hours per unit are identical.
  3. The system will report a higher overhead cost for Model R due to its use of common parts, underestimating its profitability.
  4. The system will report similar overhead costs for both models, leading to an overestimation of Model S's true profitability. (correct answer)
Explanation: A traditional system using direct labor hours will allocate the same amount of overhead per unit to both Model R and Model S because their direct labor hours per unit are identical. This fails to recognize that Model S, with its complexity and frequent setups, is the driver of significant batch-level overhead costs. The system will therefore under-allocate these costs to Model S, making it appear more profitable than it actually is. It will simultaneously over-allocate these costs to the simple Model R, making it appear less profitable. An ABC system would correctly trace the high setup costs to Model S.

Question 9

A company produces widgets and gizmos. A summary of a cost analysis is provided:

  • Total manufacturing overhead budgeted for the period: $500,000
  • Under the traditional system (based on machine hours), $220,000 of overhead is allocated to Widgets.
  • Under a new ABC system, $180,000 of overhead is allocated to Widgets.

Based solely on this information, what is the total overhead allocated to Gizmos under each system?

  1. Traditional: $280,000; ABC: $320,000 (correct answer)
  2. Traditional: $220,000; ABC: $180,000
  3. Traditional: $320,000; ABC: $280,000
  4. Cannot be determined without knowing the machine hours for Gizmos.
Explanation: The key principle is that the total overhead to be allocated is the same regardless of the allocation method used. The costing system only changes how that total amount is distributed among the products. The allocation is a zero-sum game between the products.
  • Traditional System Allocation for Gizmos: Total Overhead - Overhead for Widgets = Allocation for Gizmos $500,000 - $220,000 = $280,000
  • ABC System Allocation for Gizmos: Total Overhead - Overhead for Widgets = Allocation for Gizmos $500,000 - $180,000 = $320,000

Question 10

After switching from a traditional system to an ABC system, a company that makes bicycles found that the cost of its high-end, custom--order mountain bikes increased, while the cost of its mass-produced children's tricycles decreased.

Which strategic decision would be a direct, logical consequence of these findings?

  1. Lower the price of the mountain bikes to increase their market share and sales volume.
  2. Increase the price of the tricycles to capitalize on their newly revealed lower production cost.
  3. Re-evaluate the pricing structure of the mountain bikes to ensure they are profitable, possibly increasing the price. (correct answer)
  4. Invest in a marketing campaign to promote all products equally, as total company profit has not changed.
Explanation: The ABC results show that the mountain bikes were previously undercosted and may have been less profitable than management believed. The logical next step is to use this more accurate cost information to re-evaluate the product's pricing. It's possible the original price was set too low and needs to be increased to achieve the desired profit margin. Lowering the price (A) would exacerbate the potential profitability problem. Increasing the price of the now-known-to-be-cheaper tricycles (B) might be an option, but the more pressing issue is the potential unprofitability of the mountain bikes. Promoting all products equally (D) ignores the new, powerful information about their relative profitability.

Question 11

A manufacturing company with significant product diversity is considering a switch from a traditional costing system, which uses a single plant-wide overhead rate based on direct labor hours, to an activity-based costing (ABC) system. Which of the following products would most likely experience the largest decrease in its reported manufacturing cost after the switch?

  1. A low-volume product that requires numerous machine setups and complex engineering design.
  2. A high-volume product that is produced in long runs and has a simple, standardized design. (correct answer)
  3. A product with a high direct material cost but a low direct labor cost.
  4. A product that is sold at a higher price point than the company's other products.
Explanation: Traditional costing systems using a volume-based driver like direct labor hours tend to overcost high-volume, simple products. This is because these products are assigned a large share of total overhead based on their high volume (e.g., many labor hours), but they do not consume a large share of batch-level or product-sustaining costs (like setups or complex engineering). ABC corrects this by tracing those non-volume-related costs to the products that actually consume them (the low-volume, complex ones). Therefore, the high-volume, simple product's reported cost will decrease as it is relieved of the burden of subsidizing the more complex products.

Question 12

A company is implementing a comprehensive activity-based costing system that allocates both manufacturing and non-manufacturing costs (e.g., selling, general, and administrative) to products. The company's prior traditional system only allocated manufacturing overhead. Which of the following is a key difference in how product profitability will be portrayed?

  1. The ABC system will result in a lower total company net income because more costs are allocated to products.
  2. Inventory values on the balance sheet will be higher under the ABC system because non-manufacturing costs are included.
  3. Products that require extensive post-production support, such as marketing and customer service, will likely appear less profitable under ABC. (correct answer)
  4. All products will show lower profitability under ABC because the amount of allocated cost per product has increased.
Explanation: A comprehensive ABC system that includes non-manufacturing costs provides a more complete picture of product profitability. Products that consume significant non-manufacturing resources (like specialized marketing campaigns, complex distribution, or frequent customer service calls) will have these costs traced to them. Under a traditional system, these costs remain as period expenses and are not assigned to products, potentially making a high-maintenance product appear more profitable than it truly is. ABC reveals the full cost of supporting a product. Total company profit does not change (A), inventory cannot include non-manufacturing costs for external reporting (B), and some products that use few non-manufacturing resources may appear more profitable (D).

Question 13

A company's $1,000,000 of overhead is comprised of 30% unit-level activities (e.g., electricity), 50% batch-level activities (e.g., setups), and 20% product-sustaining activities (e.g., engineering design). The company produces Product A (a high-volume item made in a few large batches with a simple design) and Product B (a low-volume specialty item made in many small batches with a complex design). The company uses a traditional costing system based on machine hours, a unit-level driver.

Which statement most accurately describes the cost distortion created by the traditional system?

  1. It accurately allocates the unit-level costs but misallocates the batch-level and product-sustaining costs.
  2. It over-allocates batch-level and product-sustaining costs to Product A, effectively subsidizing Product B. (correct answer)
  3. It under-allocates all three categories of overhead costs to Product B, making it appear highly profitable.
  4. It correctly allocates the majority of overhead costs since batch and product-sustaining costs are only 20% of the total.
Explanation: The traditional system uses a unit-level driver (machine hours) to allocate all overhead. This works reasonably well for the 30% of costs that are truly unit-level. However, it completely misallocates the 70% of costs that are batch-level and product-sustaining. These costs are allocated based on volume (machine hours). Product A has high volume, so it is assigned a large share of the setup and engineering costs, even though it consumes very little of these resources. Product B has low volume, so it is assigned a small share of these costs, despite being the primary driver of them. This means Product A is overcosted (and subsidizes Product B), while Product B is undercosted.

Question 14

A company currently uses a single plant-wide overhead rate based on machine hours. A cost accountant proposes an ABC system and identifies a significant cost pool for 'Production Scheduling' totaling $250,000. The accountant is evaluating two potential cost drivers for this pool: 'number of production runs' or 'number of direct labor hours'.

In selecting the more appropriate cost driver for the Production Scheduling pool to improve costing accuracy over the traditional system, which factor is most critical?

  1. The driver that is easiest and least costly to measure and track.
  2. The driver that shows the lowest correlation with the existing machine-hour allocation base.
  3. The driver that best establishes a cause-and-effect relationship with the costs incurred in the scheduling activity. (correct answer)
  4. The driver that allocates the largest portion of the scheduling cost to the company's most profitable product.
Explanation: The primary goal of ABC is to improve the accuracy of cost assignments. This accuracy is achieved by identifying the underlying cause of a cost being incurred. The best cost driver is the one that has the strongest cause-and-effect relationship with the costs in the activity pool. For Production Scheduling, the number of production runs is likely a better cause-and-effect driver than direct labor hours, because each run requires a new schedule regardless of the labor hours within that run. While ease of measurement (A) is a practical concern, it is secondary to accuracy. Low correlation (B) is a likely outcome but not the goal itself. Allocating cost to a specific product (D) is not the objective; the objective is an accurate allocation regardless of the outcome.

Question 15

A company produces two products, A and B. A traditional costing system using machine hours allocates $20 of overhead to each unit of Product A (10,000 units produced) and $30 to each unit of Product B (2,000 units produced). An ABC analysis reveals two activity pools: Machining, which is volume-driven, and Setups, which is batch-driven. The analysis shows that 80% of the total setup costs are attributable to Product B, which is produced in many small batches.

Given this information, what was the total manufacturing overhead for the period, and what is the most reasonable conclusion about the cost accuracy?

  1. Total overhead is $260,000; the traditional system likely overcosts Product A and undercosts Product B. (correct answer)
  2. Total overhead is $260,000; the traditional system likely undercosts Product A and overcosts Product B.
  3. Total overhead is $500,000; the traditional system likely overcosts Product A and undercosts Product B.
  4. Total overhead cannot be determined; the accuracy of both systems is questionable.
Explanation: First, calculate total overhead from the traditional allocation: (10,000 units A * $20/unit) + (2,000 units B * $30/unit) = $200,000 + $60,000 = $260,000. Second, analyze the cost distortion. Product B, a low-volume product, consumes 80% of the batch-driven setup costs. A traditional system using a volume-based driver (machine hours) will not capture this. It will average the high setup costs across all units, effectively shifting cost from the low-volume, high-setup product (B) to the high-volume, low-setup product (A). Therefore, the traditional system overcosts Product A and undercosts Product B.

Question 16

A company switches from traditional costing (using machine hours) to ABC and discovers that its high-volume product is now less profitable while its low-volume product is more profitable. Which factor most likely explains this profitability shift?

  1. The high-volume product required proportionally more machine hours per unit than anticipated under traditional costing
  2. The low-volume product consumed batch-level and product-level activities disproportionately relative to its production volume
  3. The high-volume product consumed batch-level and product-level activities disproportionately relative to its production volume (correct answer)
  4. The company incorrectly calculated activity rates under the ABC system, overstating costs for high-volume products
Explanation: Under traditional costing using machine hours, high-volume products typically bear most overhead costs proportional to volume. ABC reveals that high-volume products often consume batch-level activities (setups, inspections) and product-level activities (engineering, design) disproportionately to their volume, making them more expensive than traditional costing suggested. Low-volume products benefit because they're not cross-subsidizing the high-volume products' non-volume-based activities. B describes the opposite scenario, A focuses on unit-level activities only, and D assumes calculation errors rather than methodological differences.

Question 17

Delta Corporation manufactures three products using traditional overhead allocation based on direct material cost. The company is considering implementing ABC with four activity pools. Current data shows Product A has high direct material costs but requires minimal setup and engineering support. Product B has moderate direct material costs but requires frequent setups and substantial engineering support. Product C has low direct material costs but requires moderate setup and engineering support.

If Delta implements ABC, which product's unit cost will most likely decrease compared to traditional costing?

  1. Product A, because its high material costs will be spread across multiple activity pools under ABC (correct answer)
  2. Product B, because ABC will more accurately capture its complex manufacturing requirements
  3. Product C, because it will benefit from lower material-based overhead allocation under ABC
  4. All products equally, since total overhead costs remain the same under both systems
Explanation: Under traditional costing, Product A bears high overhead because it has high direct material costs (the allocation base). Under ABC, Product A will likely have lower costs because it consumes fewer non-material-related activities (setups, engineering) that ABC tracks separately. Product A was cross-subsidizing Products B and C under traditional costing. B is incorrect because ABC will likely increase Product B's costs by accurately capturing its high setup and engineering consumption. C is wrong because Product C already has low material costs under traditional costing. D ignores that ABC redistributes costs differently among products.

Question 18

Omega Industries produces custom furniture using both traditional costing (based on direct labor cost) and ABC. The ABC system uses five activity pools: Design (80,000),Woodpreparation(80,000), Wood preparation (120,000), Assembly (200,000),Finishing(200,000), Finishing (150,000), and Shipping ($100,000). Two product lines are analyzed: Standard chairs requiring minimal design but high assembly time, and Custom tables requiring extensive design and finishing but minimal assembly time. Total annual overhead is $650,000.

If Standard chairs are allocated 60% of assembly costs but only 20% of design costs under ABC, while representing 70% of total direct labor cost, what does this suggest about the cost accuracy under each system?

  1. Traditional costing overstates Standard chair costs because labor cost doesn't reflect the design-intensive nature of furniture production (correct answer)
  2. Traditional costing understates Standard chair costs because these chairs consume assembly activities disproportionately to labor cost
  3. ABC overstates Standard chair costs by allocating too much assembly cost relative to the chairs' actual resource consumption
  4. Both systems provide equivalent accuracy since Standard chairs represent the majority of production volume
Explanation: Standard chairs get 70% of overhead under traditional costing (70% of direct labor cost) but under ABC they get less design cost (20% vs 70%) and more assembly cost (60% vs 70%). Since design is expensive ($80,000) and Standard chairs use little design, traditional costing overstates their costs by allocating design costs based on labor rather than actual design consumption. The assembly allocation difference is smaller and doesn't offset the design misallocation. B is incorrect because assembly consumption (60%) is less than labor allocation (70%). C and D misinterpret the cost accuracy implications.

Question 19

A manufacturing company finds that after implementing ABC, the cost difference between its simplest and most complex products increased from 15% under traditional costing to 45% under ABC. What does this indicate about the previous costing system?

  1. Traditional costing was accurately reflecting the true cost differences between simple and complex products
  2. Traditional costing was understating the resource consumption differences between simple and complex products (correct answer)
  3. ABC is overstating costs for complex products due to inappropriate activity driver selection
  4. The company should return to traditional costing since it showed smaller cost variations between products
Explanation: The increased cost spread under ABC (from 15% to 45%) indicates that complex products consume significantly more resources than traditional costing captured, while simple products consume less. Traditional volume-based allocation was averaging costs and understating the true differences. Complex products likely consume more batch-level and product-level activities that ABC properly assigns. A is wrong because traditional costing underestimated differences. C assumes ABC errors without evidence. D misunderstands that smaller variations don't indicate accuracy—ABC's larger spread likely reflects reality.

Question 20

Tech Solutions Inc. manufactures two software products: Basic (high volume, standardized) and Enterprise (low volume, customized). Under traditional costing using programmer hours, overhead allocation is 150perprogrammerhour.ABCidentifiesthreeactivities:Programming(150 per programmer hour. ABC identifies three activities: Programming (800,000), Customer Support (400,000),andProductCustomization(400,000), and Product Customization (300,000). Basic uses 3,000 programmer hours annually and requires minimal support and no customization. Enterprise uses 2,000 programmer hours and requires extensive support and customization.

If ABC allocates 15% of Programming costs, 80% of Customer Support costs, and 90% of Product Customization costs to Enterprise, how much will Enterprise's overhead cost per programmer hour change compared to traditional costing?

  1. Enterprise's overhead cost per programmer hour will increase by approximately $50 under ABC
  2. Enterprise's overhead cost per programmer hour will increase by approximately $100 under ABC
  3. Enterprise's overhead cost per programmer hour will increase by approximately $200 under ABC (correct answer)
  4. Enterprise's overhead cost per programmer hour will decrease by approximately $75 under ABC
Explanation: Traditional: Enterprise gets 2,000 hours × $150 = $300,000. ABC: Enterprise gets Programming (15% × $800,000 = $120,000) + Customer Support (80% × $400,000 = $320,000) + Customization (90% × $300,000 = $270,000) = $710,000 total. Per programmer hour: $710,000 ÷ 2,000 = $355. Increase: $355 - $150 = $205 ≈ $200. This reflects Enterprise's high consumption of support and customization activities not captured by traditional programmer-hour allocation. A, B, and D represent calculation errors or misallocation of activity costs.