Chapter 5, End of Chapter, Decision Points, Exercise 1

Different costs derived using the broad average method and the activity based cost system result in undercosting and overcosting of the product, respectively.

• The products are understated when maximum resources are put into use in making the products. However, a low cost is required for such products.
• The products are overstated when the utilization of maximum resources by the companies, result in high cost. This ultimately adds to the cost of the products. High resource cost results in a high cost of product.