Answer (B) is correct . ABC is one means of improving a cost system to avoid what has been called peanut-butter costing. Inaccurately averaging or spreading costs like peanut butter over products or service units that use different amounts of resources results in product-cost cross-subsidization. This term describes the condition in which the miscosting of one product causes the miscosting of other products. In a traditional system, direct labor and direct materials are traced to products or service units, a single pool of costs (overhead) is accumulated for a given organizational unit, and these costs are then assigned using an allocative rather than a tracing procedure. The effect is an averaging of costs that may result in significant inaccuracy when products or service units do not use similar amounts of resources. The total change order cost is $6,000 [(8 + 2) × $600], the cost per machine hour is $1.20 {$6,000 ÷ [(2 × 1,000) + (3 × 1,000)] hours}, and the unit costs assigned on a machine-hour basis to X and Z are $2.40 ($1.20 × 2 hours) and $3.60 ($1.20 × 3 hours), respectively. However, if the change order costs are traced directly to X and Z, the unit costs assigned will be $4.80 [(8 orders × $600) ÷ 1,000 units] and $1.20 [(2 orders × $600) ÷ 1,000 units], respectively. Hence, the unit amount by which machine-hour-based assignment overcosts Z and undercosts X (the cross-subsidy) is $2.40 ($3.60 – $1.20 or $4.80 – $2.40).
Answer (A) is incorrect because The unit cost per machine hour or the unit cost directly attributable to Z is $1.20.
Answer (C) is incorrect because The unit cost assigned to Z on the machine-hour basis is $3.60.
Answer (D) is incorrect because The unit cost assigned to X on a direct-tracing basis is $4.80.
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