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Which of the following is a limitation of traditional costing systems?

Practice Questions

Q1
Which of the following is a limitation of traditional costing systems?
  1. They provide accurate product costing
  2. They may lead to overcosting or undercosting of products
  3. They are easy to implement
  4. They focus on direct costs only

Questions & Step-by-Step Solutions

Which of the following is a limitation of traditional costing systems?
  • Step 1: Understand what traditional costing systems are. They are methods used to assign costs to products based on simple calculations.
  • Step 2: Recognize that these systems often use a single overhead rate to allocate costs, which means they apply the same rate to all products.
  • Step 3: Identify that this method can be too simplistic because different products may use resources differently.
  • Step 4: Realize that because of this, some products may be charged too much (overcosting) while others may not be charged enough (undercosting).
  • Step 5: Conclude that the limitation of traditional costing systems is their inability to accurately reflect the true costs of products.
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