Define cost

smoothing,

and describe the consequences it can have on costs.

What is cost smoothing?

A.

Cost smoothing describes a costing approach that allocates indirect costs to cost objects based on the budgeted average indirect cost rates multiplied by the budgeted quantities of the cost allocation bases.

B.

Cost smoothing describes the method of calculating the average fixed manufacturing overhead cost of each unit produced or service performed.

C.

Cost smoothing describes a costing system that uses direct costs to assign the cost of resources directly to cost objects.

D.

Cost smoothing describes a costing approach that uses one average cost allocation rate for assigning the cost of resources uniformly to cost objects.

What are the possible consequences of using cost smoothing to calculate unit costs?

A.

By ignoring the allocation of indirect costs to the cost objects, cost smoothing can lead to product overcosting.

B.

By ignoring the variation in the consumption of resources by different cost objects, cost smoothing can lead to inaccurate and misleading cost data.

C.

Cost smoothing, which ignores actual average indirect cost rates, can lead to product overcosting or product undercosting.

D.

Cost smoothing does not take into account variable cost components, and therefore, this method is unable to provide meaningful data when estimating costs across various levels of activity.