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.
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