COST ACCOUNTING
ACTIVITY BASED MANAGEMENT
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
ABC uses a single overhead rate
|
|
|
ABC uses more cost pools and cost drivers
|
|
|
ABC uses both volume and non-volume based cost drivers
|
|
|
ABC assumes OH costs are driven by volume-based cost drivers
|
Detailed explanation-1: -Activity based costing systems are more accurate than traditional costing systems. This is because they provide a more precise breakdown of indirect costs. However, ABC systems are more complex and more costly to implement. The leap from traditional costing to activity based costing is difficult.
Detailed explanation-2: -Companies usually use traditional costing for external reports, because it is simpler and easier for outsiders to understand. However, it does not give managers an accurate picture of product costs because the application of overhead burden rates is arbitrary and applied equally to the cost of all products.
Detailed explanation-3: -What are three advantages of activity-based costing over traditional volume-based allocation methods? More accurate product costing, more effective cost control, and better focus on the relevant factors for decision making.
Detailed explanation-4: -Related Cost Drivers Whereas, in ABC, costs are first apportioned to activities and then to products. The two processes are, hence, very similar, but the first stage is different, as ABC uses activities instead of functional departments (cost centres) to compute the overhead allocation rate.