[Anonymous]

The use of activity-based costing normally results in:

a. Decreased set-up costs being charged to low-volume products.

b. Equalizing set-up costs for all product lines.

c. Substantially lower unit costs for low-volume products than is reported by traditional product costing.

d. Substantially greater unit costs for low-volume products than is reported by traditional product costing.

The answer choice id D. The explanation doesn’t elaborate more than that answer option. Can someone please elaborate on why this is, and why it is not substantially lower unit costs vs higher? I initially thought it was answer C.

Thanks in advance.

[SonjaBlue]

It seems like some useful information was left out of this question, so I think I can explain the answer if I make some assumptions based upon my understanding of ABC theory.

Assume: This question is asking about the effect of ABC on unit Fixed Costs and not unit Variable Costs

VC = $10

If you produce 1 unit: your Unit Cost is $10 and your Total Costs are $10

If you produce 2 units: your Unit Cost is $10 and your Total Costs are $20

If you produce 4 units: your Unit Cost is $10 and your Total Costs are $40

If you produce 10 units: your Unit Cost is $10 and your Total Costs are $100

Analysis: Unit costs remain the same and Total Costs increase for Variable Costs

FC = $1M

If you produce 1 unit: your Unit Cost is $1M and your Total Costs are $1M

If you produce 2 units: your Unit Cost is $500K and your Total Costs are $1M

If you produce 4 units: your Unit Cost is $250K and your Total Costs are $1M

If you produce 10 units: your Unit Cost is $100K and your Total Costs are $1M

Analysis: Unit costs decrease and Total Costs remain the same for Fixed Costs

Under this model, a low volume product (1 widget made as opposed to 10 widgets made) does have greater unit costs ($1M as opposed to $100K).

I hope this helps!

P.S. Part of passing this test for me has been learning to read between the lines of what the questions are asking. I almost had to know that a,b,and c made no sense at all (that only D could be a correct answer) to get this one right.

FAR 02/26/13 78 [05/25/12 67]
AUD 07/07/12 85
REG 05/28/13 80 [08/25/12 72]
BEC 11/26/12 81

[SonjaBlue]

And . . . I'm not even sure that my answer is really “right” . . . sometimes the exam just has bad questions.

FAR 02/26/13 78 [05/25/12 67]
AUD 07/07/12 85
REG 05/28/13 80 [08/25/12 72]
BEC 11/26/12 81

[Anonymous]

It may not be really “right” but its a very clear cut and elaborate explanation that works for me. It seems like you come to figure they are talking about fixed costs/unit without the question answer options stating so. I hate these “assumption” type MCQ's.

Also, this is a great detailed explanation of the characteristics and differences of fixed costs and variable costs which have several MCQ's as well.

Thanks for your response! Greatly appreciated.

[Author]

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