A Melbourne-based company Acacia is considering the adoption of an activity-based costing system because they suspect that their traditional costing system distorts the product costs. Acacia produces and sells two products A and B. Their traditional costing system uses direct labor hours as the allocation base for manufacturing overhead cost.

Correct answer is (D) Undercosted by $6.60

A Melbourne-based company Acacia is considering the adoption of an activity-based costing (ABC) system because they suspect that their traditional costing system distorts the product costs. Acacia produces and sells two products A and B. Their traditional costing system uses direct labor hours as the allocation base for manufacturing overhead cost. Additional information: Product B Direct materials (DM) Direct labor (DL) Units produced Product A S38 per unit $24 per unit $28 per unit $12 per unit 50,000 units 200,000 units The production managers decided that major activities are DL labor support, Machine setups, and Parts administration and determined the costs for each activity. They also identified how many DLHs, setups, and parts each product requires as follows: Product B 200,000 DLHs Product A Activity Direct labor support (DLHs) Machine setups (setups) Parts administration (part types) Cost $900,000 $600,000 $300,000 100,000 DLHs 400 setups 200 parts 100 setups 200 parts Total MOH $1,800,000 11 Compared with the unit product cost calculated by the ABC system, what is the distortion (difference) created by the traditional costing system for Product A? A. Product A is o B. Product A is undercosted by C. Product A is overcosted by D. Product A is undercosted by 6.60 E. None of the above $ 1.65 S 1.65 S 6.60 vercosted by