Question - A firm produces two products in the same facility using the same equipment. Product XYZ is a higher volume product that takes a relatively small amount of machine-time per unit to produce, while Product FTP is a lower volume product that takes a significantly higher amount of machine-time per unit to produce. In addition, it takes very little set-up time to prepare to produce a batch of Product XYZ, while a batch of Product FTP requires a more time-consuming set-up. Product XYZ is produced in large batches, while Product FTP is produced in small batches. Customers who purchase XYZ make relatively large purchases (in terms of the number of units purchased) while customers who purchase FTP make relatively small purchases (in terms of the number of units purchased). Both products are shipped in a similar way, with each shipment requiring a similar amount of work.
If this firm allocates manufacturing overhead based on production volume, what result would you expect? Be specific in your answer.
How could the firm improve its allocation system? Be specific in your answer.