[Anonymous]

The provided answer to this problem seems counter intuitive to me. If there is a low volume product, wouldn’t it consume fewer resources, and consequently have a lower cost?

Thanks for your help

The use of activity-based costing normally results in:

Correct A.

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

B.

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

C.

decreased set-up costs being charged to low-volume products.

D.

equalizing set-up costs for all product lines.

You are correct, the answer is A.

In the past, conventional costing techniques assigned indirect manufacturing costs to a single (or few) cost pool(s) and allocated those costs based on a single (or few) allocation base(s). The result was that both high and low volume products received the same unit “dosage” of indirect costs.

Activity-based costing (ABC) utilizes multiple cost pools for accumulating indirect costs. These costs are then allocated to products in proportion to the respective products’ consumption of those resources. Thus, low volume products which consume more resources (such as set-up costs) receive substantially greater unit costs than they would receive under traditional costing.