Question

Airco Company is tempted to consider support department costs to be facility-level costs that do not need to be applied to products. Which of the following explains what is misguided about this approach?
1. Product costs may be inaccurate because straight-line depreciation on factory equipment is treated as a genera and administrative expense on the income statement.
2. Product costs may be inaccurate because support department services may be used more heavily by some products than others.
3. Product costs may be inaccurate because incorrect cost drivers are used.
4. Product costs may be inaccurate because direct labor and direct materials are not correctly accounted for in thu product costing system.

Answer 1

Answer:

Option 2. Product costs may be inaccurate because support department services may be used more heavily by some products than others.

Explanation:

Option 1 is not a misguide about this approach as all the depreciation costs are considered as general or administration expenses.

Option 3 is incorrect because cost drivers of cost pools are always accurate, they can not be used inaccurately while using Activity Based Costing.

Option 4 is also incorrect because direct costs are prime cost which are easily attributable to products and in this scenario, the indirect costs are considered inappropriate to be assigned to the product cost.

Option 2 is correct because considering support department costs to be facility-level costs would result in inappropriate cost allocations to some products as a single appropriate basis would be used to allocate the support department services cost to each product. This means if appropriate basis is not chosen correctly then this would result in inaccurate allocation as some of the products will be using the support services heavily than others.