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1、CHAPTER5:ACTIVITY-BASEDCOSTINGANDMANAGEMENTQUESTIONS5-1Productcostsarelikelybeingdistortedwhenafirmusesaplantwideordepartmentaloverheadrateiftheplantordepartmentengagesinmorethanoneactivityinitsoperationsandnotallactivitiesconsumeoverheadinthesamepro
2、portion.Themorediversetheproductmixesoftheplantordepartmentareinvolume,sizes,manufacturingprocesses,orproductcomplexitiestheplantordepartment,theworsecostdistortionsarelikelytobeinusingaplantwideordepartmentaloverheadratetoassignoverheadcoststocostob
3、jects.5-2Undercostingaproductmayappeartohaveincreasedthereportedprofittheproductearned(assumingthefirmdidnotloweritssellingpricebecauseofthereportedlowerproductcost).However,theincreasedprofitis,atbest,atwistintruth.Costsoftheproductnotchargedtothepr
4、oductitselfarebornebyotherproductsofthefirm.Worse,undercostingaproductmayresultinmanagerserroneouslybelievingtheproducttobemoreprofitablethanotherproductsandshiftingthelimitedresourcethefirmhasintomanufacturing,promotion,andsalesoftheproductwhen,infa
5、ct,otherproductsaremoreprofitabletothefirm.Severecostdistortionsmayleadfirmsnottodropunprofitableproductsbecausethecostdatashowtheseproductsareprofitable.5-3Overcostingdoesnotincreaserevenues.Afirmcanincreasethesellingpriceofaproduct,therebyincreasei
6、ngthetotalrevenuefromtheproductonlyifthemarketallows.Increasesinthesellingpriceofaproductwithoutexperiencingnoticeabledecreaseinthesalesquantityoftheproductislikelyanindicationthattheproductwasnotpricedproperly,whichmightbearesultofundercostingofthep
7、roduct.Furthermore,overcostingaproductislikelyaccompaniedbyundercostingofthefirm’sotherproductsand,asaresult,underpricingofoneormoreofthefirm’sotherproducts.Whenafirmsetsahighsellingpricethatisaresultofovercosting,competitorsalsoarelikelytoenterthema
8、rketandtakeawaythefirm’smarketshare.Afirmalsomaydroporde-emphasizeanerroneouslyovercostedproductwheniterroneouslybelievetheproductiseitherunprofitableorhavingalow-margin.5SolutionsManual5-5-4Activity-basedcostingrecognizesthatresourcesarespentonactiv
