Question

Volume-based costing allocates indirect product costs based on the volume of output, using such allocation bases...

Volume-based costing allocates indirect product costs based on the volume of output, using such allocation bases as direct labor hours, machine hours, or the amount of direct material used in the production process. Activity-based costing (ABC) has consistently shown that Volume-based costing ___________ the cost of high volume products and ______________ the cost of low volume products.

High Volume Products Low Volume Products
A. Overstates Overstates
B. Overstates Understates
C. Understates Overstates
D. Understates Understates

Option A

Option B

Option C

Option D

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Answer #1

Activity-based costing (ABC) has consistently shown that Volume-based costing Overstates the cost of high volume products and Understates the cost of low volume products.

Correct option is (B)

Under volume based costing, overheads are allocated to different production manufactured on the basis of volume factor like number of units produced or the number of direct labor hours used or the number of machine hour used. Hence, the products which have high volume, get higher portion or overhead cost. Thus, high volume products are over casted and low volume products are under casted in volume costing.

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