High-Volume Products

Definition

High-volume products refer to items that are produced and sold in large quantities within a company's product portfolio. These products typically account for a significant portion of a firm's revenue and are often the focus of traditional costing systems, which allocate overhead costs based on volume-related drivers like direct labor hours or machine hours.

5 Must Know Facts For Your Next Test

1. Traditional costing systems tend to over-allocate overhead costs to high-volume products, while under-allocating costs to low-volume products.
2. Activity-based costing (ABC) is often more accurate in assigning overhead costs to products, as it considers the various activities and resources required for production.
3. High-volume products typically have lower unit costs compared to low-volume products due to economies of scale and more efficient production processes.
4. Accurate cost information is crucial for pricing decisions, product mix analysis, and strategic decision-making, especially for companies with a diverse product portfolio.
5. Activity-based costing can provide better insights into the true profitability of high-volume and low-volume products, enabling more informed management decisions.

Review Questions

• Explain how traditional costing systems may distort the costs of high-volume products compared to low-volume products.
  • Traditional costing systems often rely on volume-based drivers, such as direct labor hours or machine hours, to allocate overhead costs to products. This approach tends to over-allocate overhead costs to high-volume products, while under-allocating costs to low-volume products. This distortion occurs because high-volume products typically consume a smaller proportion of overhead resources per unit compared to low-volume products, which require more specialized resources and processes. As a result, traditional costing systems may overstate the profitability of high-volume products and understate the profitability of low-volume products.
• Describe how activity-based costing (ABC) can provide a more accurate cost assignment for high-volume and low-volume products.
  • Activity-based costing (ABC) is designed to address the limitations of traditional costing systems by allocating overhead costs based on the activities and resources required to manufacture a product, rather than using volume-based drivers. ABC identifies the various activities involved in production, such as setups, inspections, and material handling, and assigns costs to products based on their consumption of these activities. This approach is particularly beneficial for companies with diverse product portfolios, as it can more accurately capture the differences in resource requirements between high-volume and low-volume products. By providing a more precise cost assignment, ABC can help managers make better-informed decisions about pricing, product mix, and resource allocation.
• Analyze the potential strategic implications of using activity-based costing (ABC) instead of traditional costing systems for a company with a mix of high-volume and low-volume products.
  • Adopting an activity-based costing (ABC) system can have significant strategic implications for a company with a mix of high-volume and low-volume products. By providing more accurate cost information, ABC can help managers identify the true profitability of each product, enabling them to make better-informed decisions about pricing, product mix, and resource allocation. For example, ABC may reveal that some low-volume products are more profitable than previously thought, leading the company to reconsider its product portfolio and focus on higher-margin items. Conversely, ABC may show that certain high-volume products are less profitable than assumed, prompting the company to explore ways to improve their efficiency or consider discontinuing them. This enhanced cost visibility can also support strategic decision-making, such as outsourcing, make-or-buy analysis, and investment in new technologies or processes to improve the competitiveness of both high-volume and low-volume products.

Related terms

Low-Volume Products: Products that are produced and sold in smaller quantities compared to high-volume products, often requiring more specialized resources and processes.

Activity-Based Costing (ABC): A costing system that assigns overhead costs to products based on the activities and resources required to manufacture them, rather than using volume-based drivers.

Overhead Costs: Indirect costs that cannot be easily traced to a specific product, such as rent, utilities, and administrative expenses.