EXERCISE 8-21 (CONTINUED)

4. Perhaps the competition hasn’t been able to touch CarryAll’s price be-

cause CarryAll has been selling its specialty briefcases at a price that

may be below its cost. Thus, rather than “gouging” its customers, Car-

ryAll’s competitor is probably just pricing its specialty items at a normal

markup over their cost. Indeed, according to the activity-based costing

system, if CarryAll is to realize a profit on its specialty items it may need

to charge a price more in line with its competitor’s price.

When a company sells a product at a price substantially below that of its

competitors, the company’s management should take a careful look at

the costing system to be sure that the product is being assigned all the

costs for which it is responsible.

Group Exercise 8-35

The most equitable way to divide the dinner bill among a group of friends

is probably to figure out the cost of what each individual consumed and di-

vide up the bill accordingly. However, it would be easier to simply divide

the total bill by the number of individuals. Everyone would then pay exactly

the same amount. This issue relates to material in the chapter because the

former method of charging individuals for the costs of what they consume

is similar to activity-based costing and the method of just dividing the bill

equally is similar to traditional costing methods. Figuring out the cost of

what each individual consumes is the most accurate method, but it may

take too much time and energy to be worth the bother.

Group Exercise 8-36

An activity-based costing system typically reduces the amount of overhead

cost that is allocated based on direct labor-hours—shifting the overhead to

other cost pools. Under an activity-based costing system, some of the

overhead will be allocated based on the number of batches run, the num-

ber of products in the company’s active list, and so on. This shifts costs

from high-volume products produced in large batches to low-volume prod-

ucts produced in small batches. Once this is understood, the answers to

the questions posed in the group exercise can be easily answered.