What is Activity-based Costing?

This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods.

What are some of the limitations of Activity-based costing systems?

Managers and employees may resist the change to activity-based costing. ABC procedures produce numbers that do not match traditional costing. ABC requires substantial resources.

What is the primary benefit of activity-based costing?

Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them.

How does Activity-based costing improve business processes?

Activity-based costing improves control over overhead costs, setting up equipment is a batch-level activity, in activity-based costing each cost pool has its predetermined overhead rate, and activity-based costing is less expensive to implement than traditional costing.

What are the steps in Activity-based costing?

First, identify the products that are the chosen cost objects, then identify the direct costs of the products, next, identify the direct prices of the products, and lastly, select the activities and cost-allocation bases for allocating indirect costs to the consequences for giving indirect costs to the products.

Activity-based Costing MCQ Quiz With Answers

1. Which of the following statements is true about activity-based costing (ABC)?

ABC is a costing method designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore "fixed\" costs
ABC is an ordinary a replacement, rather than a supplement for, the company's usual costing system
Most organizations that use ABC have only one costing system that serves the needs of external reports and internal decision-making
In practice, ABC can only be done one way correctly, meaning that different "flavors\" are not allowed

2. In ABC:

Non-manufacturing costs may not be assigned to products
Some manufacturing costs may be excluded from product costs
Allocation bases are the same as those used in traditional costing methods
Similar to traditional costing, ABC only uses one overhead cost pool

3. Dividing departmental costs into activity cost pools is known as:

First-stage allocation
Second-stage allocation
Third-stage allocation
Fourth-stage allocation

4. To calculate activity rates, all of the following are necessary except:

Determine the total activity for each cost pool that would be required to produce the current product mix
Determine the total activity for each cost pool that would be required to serve present customers
Calculate activity rates by dividing the total cost for each activity by its total activity
Calculate activity rates by dividing the total cost for each activity by the percentage of the activity allocated to the product

5. Which of the following would not be deducted from sales in a management report prepared using ABC?

Direct materials
Direct labor
Variable selling and administration costs
Shipping costs

6. Which of the following is different in ABC when compared to traditional costing?

Traditional costing and ABC costing usually yield very similar product costs
In an ABC costing system, costs are only assigned to products that actually required work that gave rise to a particular cost
In ABC, batch-level costs are applied to products using unit-level bases
Under traditional costing, batch-level costs are shifted from high-volume products to low-volume products

7. Which of the following is a true statement concerning the use of ABC systems to generate external reports?

Companies do not use ABC systems for external reporting purposes because it does not conform to GAAP
Some companies use ABC systems for external reporting but they must reconcile product costs to GAAP before generating reports
Auditors prefer ABC because of its objective approach to cost allocation