Question #1a) List and describe four potential problems with a “traditional” overhead allocation...

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Question #1a) List and describe four potential problems with a “traditional” overhead allocation system.b) List and describe four “red flags” that may indicate you should consider revising your overhead allocation system.Question #2a) Describe the differences between unit-related, batch-related, and product-sustaining activities. Give one example of each type of activity.b) Describe the difference between transaction drivers and duration drivers. When would one type be preferred over the other?
	
Document Preview: Question #1a) List and describe four  potential problems with a “traditional” overhead allocation system. b) List and describe four “red flags” that may indicate you should consider revising your overhead allocation system. Question #2a) Describe the differences between unit-related, batch-related, and product-sustaining activities. Give one example of each type of activity. b) Describe the difference between transaction drivers and duration drivers. When would one type be preferred over the other?

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Revised answers for Order Id TTs130213_74786_4
Question #1
a) List and describe four potential problems with a “traditional” overhead allocation system. 
1) Use of single volume-based cost driver.   Factory overhead costs are allocated on the basis of just one cost driver such as machine hours or direct labor hours. This suggests that there is only one cost driver that causes factory overhead cost to accumulate. In reality, there are many cost drivers of the factory overhead: machine setups, ordering materials, inspections, special handling of materials, special storage and so on. The more diverse in products or services that a firm offers, the bigger the problem of allocating all costs of these various manufacturing activities with the use of a single volume-based cost driver.
2) Inaccurate product or service costs.  Volume-related cost drivers are inappropriate for overhead costs that are not affected by volume. All overhead costs accumulated by performing all the diverse activities of manufacturing will be contained in just single cost pool and will be divided by the single cost driver. This results in one plant-wide overhead rate that is applied to all products regardless of the number of activities and the complexity of those activities. Since the cost of many of the diverse activities do not correlate at all to the single volume-based cost driver, this can lead to low-volume products being undercosted, while high volume products are overcosted. Complex (low-volume) products are not allocated an adequate amount of overhead costs while simple (high-volume) products get too much.
3) Selling prices are not accurately set.  Because of the product cost distortions that resulted due to undercosted or overcosted products or services, the firm will end up with a pricing strategy that is not profitable and competitive in the market. Undercosted products will be selling at a loss while overcosted products will not be price-competitive especially if competitors are selling the same products at a lower cost.
4) Overhead costs do not include non-manufacturing overhead costs.  Another  problem with traditional allocation of overhead costs is that operating expenses such selling,

Question #1 a) List and describe four potential problems with a “traditional” overhead allocation system. b) List and describe four “red flags” that may indicate you should consider revising your...

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