The mark-up of product D is below 25%, therefore it has to be droped. The only product that remains is product B. Assuming that B is the only product left and the amount will be increased from 3000 to 4000, the mark-up will again be under 25%, which will lead to the company at the end having no products left.
3. What is going on?
4. What would happen if the firm kept its existing cost system but differentiated between variable and fixed cost and decided to maximize contribution?
Since only one burden rate is used for the cost system we one apply would be to differentiate variable costs between different products. Thus a separate allocation rate for each product has to be calculated. Assuming that fixed costs are the same for each product, the whole amount of
5. What would happen if the firm modified its cost system so that all variable costs were traced to the product accurately but fixed costs were
allocated using the existing system?
The fixed costs for product line A/B and C/D are the same – which means that you just differentiate between two product lines. This process costing systems implies that fixed costs are not allocated accurately to one product, just for a large number of units of outputs. ← Just two different fixed costs instead allocated to four product lines at each product!
The Research paper on Activity Based Costing Cost Abc System
During the 80's, it be came apparent that the conventional techniques for recovering overheads were increasingly providing the management with cost information that was inaccurate and misleading. New techniques for overhead recovery was needed Innes, J. & Mitchell. F, (1991). In order to produce a more accurate costing system, Cooper and Kaplan in 1988 developed a more refined approach for ...
6. What would happen if the firm modified its cost system so that it contained two cost pools, one containing the overhead costs associated with Products A and B and the other the overhead costs associated with Products C and D, and then allocated these overhead pools on the basis of direct labor hours?
