Answer :

By the statement “the cost include direct material, direct labor, and unit based variable overhead, such as
power and other machine cost” (par.1, line 12), we can say that this firm using traditional cost behaviour (or volume
cost behaviour). This costing method only calculates costs that affect the amount of goods produced. In other words,
the cost per unit is only connected to the driver unit, which is the production unit.

This firm also assume that fixed cost will unchanged if they add their product line. Including set up
machinery cost, and product checking cost which is considered that does not affect the number of production units
because it is done not at the production stage (carried out before and after the production process). It will be
misleading in decision making, since this cost are not fixed cost at all. Because it can change on particular amount of
unit produce (that the cost driver is not only production unit as VCB says). So, using VCB will not change the amount
of fixed cost since they assume that any costs that arise and are not affected by the number of units produced are
said to be fixed costs and will not change as long as production is carried out.

The reality is, when this firm add their product line which is estimated not to require additional fixed costs,
an unaccurately project occurs.

The answer is can solve by using another cost behaviour which is activity cost behaviour. The factors that
become the problem will be mentioned below along with the settlement using activity cost behaviour.

1. Fixed cost change dramatically

The firm assume that fixed cost will unchange using VCB. The reality is fixed cost will also can change
in line with the addition of certain quantities of production units. Adding new product require
additional machine to be add that will increase the amount of fixed cost.
2. Hire more inspection labor
 Since the cost driver of this is not unit produce, it will not count using VCB. But based on ACB it will
count using another driver, which is batch – driver.
3. Used more resources to handle increase volume
It will also count if the firm using ACB, but not if they use VCB. Because it wll not change the
production unit based on VCB. But it will still count by using other cost driver if they use ACB.
4. Increase number of staff
It will also add the amount of cost obtain by this firm. Using ACB, it will count along with the
additional unit produce (because in a particular amount of unit produce, it will increase), but if using
VCB it will chategorized as fixed cost that will unchange whatever the amount of unit produce.

Conclusion :
The company should use ACB to determine the amount of the cost. because when the company adds its product
line, many fixed costs on the VCB do not count the amount of change, much increases. cause decision making errors.
if the company uses ACB, this will be taken into account so that decision making becomes more accurate.