Question

Question 1: True or False, one mark each (5 marks) Encircle the correct answer 1) Companies that overcost products will most likely lose market share. a. True b. False 2) If a company overcosts one of its products, then it will undercost at least one of its other products. a. True b. False 3) When refining a costing system, a company should classify as many costs as possible as direct costs. a. True b. False 4) Activity-based costing helps identify various activities that explain why costs are incurred. a. True b. False 5) Activity-based Costing systems create homogeneous cost pools linked to different activities. a. True b. False

Answer 1

Answers:

1. a.True

Overcosting a product may result in loss of market share.

Explanation: Overcosting means when a product consumes a comparitively low level of resources to make, but it is reported to have a high total cost. So when the company overcost the product, they will lose it customers to thier competitiors. In reality, the production of the particular product cost much lesser than what they have reported to the management. So in order to gain the market shares, they will need to cut down the selling price of the product.

2. a.True

If a company overcosts one of its products, then it will undercost at least one of its other products.

Explanation: Overcosting happens if a product consumes low level of resources but is reported as a higher cost one. And undercosting is vice-versa. And when a company overcosts one product, it will undercost the other. This strategy is called as product-cost cross-subsidization. So this strategy is used for funding one product with profits gained by another product. This is commonly used when the costs are in an average or are uniform.

3. a. True.

When refining a costing system, a company should classify as many costs as possible as direct costs.

Explanation: A refined costing system is a type of cost system which uses "broad average" for allocating resource cost to various object costs like products or jobs etc. These gives a good quantification of indirect resource costs which is by used by various products or services or jobs, irrespective of the fact that these objects use different indirect resources.

One of the major guideline to refine a cost system is direct cost tracing. In the direct-cost tracing, we need to idenify as many direct costs. This will help to reduce the costs identifiedas indirect costs.

4. a. True.

Activity-based costing helps identify various activites that explain why costs are inclurred.

Explanation: Activity-based costing is one of the best tool for refining a costing system. In the activity-based costing, it helps to refine cost system by recognizing individual activity as importatnt cost object. It also helps to measure the non-similarity or difference in the use of overhead resources in an organisation. It helps to classify the costs incurred during even an early stage of production.

5. a. True.

ABC systems create homogeneous cost pools linked to different activities.

Explanation: ABC cost system is a refined cost system. The ABC system has homogeneous indirect cost pools and use cost drivers for the cost allocation process. It focus more on indirect costs as the direct costs can be easily classified and allocated. As the name says, it does activity based or activity specific cost allocation. So, it allocate costs to products by analysing and measuring the activities cost allocation base which is used by different products. This helps in identifying more right costs.