AD2102 Topic 5 Questions

1) What is the purpose of Activity Based Costing (ABC)?

• a. To determine the cost of individual products or services more accurately

• b. To allocate indirect costs to products or services

• c. To provide a detailed view of the production process

• d. All of the above

Answer explanation

Answer: All of the above

Explanation: ABC aims to determine the cost of individual products or services, allocate indirect costs to products or services, and provide a detailed view of the production process.

2. Reorder the following steps of activity-based cost allocation:

• Assign overhead costs to activity cost pools

• Calculate activity rates

• Assign overhead costs to cost objects

• Identifying and defining activities

• Prepare management reports

Answer explanation

3) What is the main difference between traditional cost accounting and ABC? (pick 2 options)

• a. ABC focuses on the cost of individual activities while traditional cost accounting focuses on the cost of products

• b. ABC uses a single overhead rate while traditional cost accounting uses multiple overhead rates

• c. ABC is more accurate than traditional cost accounting

• d. Traditional cost accounting is more complex than ABC

Answer explanation

Answer: ABC focuses on the cost of individual activities while traditional cost accounting focuses on the cost of products

Explanation: ABC provides a more detailed view of the cost structure by focusing on the cost of individual activities and allocating costs to products or services based on their consumption of those activities. Traditional cost accounting typically allocates overhead costs using a single overhead rate based on machine hours or direct labor hours.

4) Is it possible to have a product that is unprofitable under traditional cost accounting but profitable under ABC?

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Answer explanation

Answer:  Yes

Explanation: Yes, this is possible because ABC provides a more detailed view of the cost structure and can reveal that certain products consume more resources or activities than previously thought. This information can help a company make better decisions about pricing and production.

5) Which of the following is not considered a direct potential benefit of using ABC?

• a. Improved cost accuracy

• b. Increased production speed

• c. Improved budget control

• d. Improved resource allocation

Answer explanation

Answer: Increased production speed

Explanation: ABC provides improved cost accuracy, improved resource allocation, and improved budget control, but does not directly increase production speed.

6) What is the direct role of activity drivers in ABC?

• a. To determine the cost of activities

• b. To allocate costs to products or services

• c. To measure the activity level of individual products or services

• d. To identify opportunities for process improvement

Answer explanation

Answer: to measure the activity level of individual products or services

Explanation: Activity drivers are used to measure the activity level of individual products or services and determine their consumption of activities. This information is then used to allocate costs to products or services.

7) Is ABC appropriate for all types of organizations and businesses?

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Answer explanation

Answer: No 

Explanation: ABC is not appropriate for all businesses and may not provide sufficient value for organizations with simple processes and a limited number of products. It is more appropriate for organizations with complex processes and a large number of products.

8) What is the main limitation of ABC?

• a. It can be complex to implement

• b. It is not relevant for all businesses

• c. It is inflexible in rapidly changing environments

• d. All of the above

Answer explanation

Answer: All of the above 

Explanation: ABC can be complex to implement, may not be relevant for all businesses, and can be inflexible in rapidly changing environments.

9) Under traditional absorption costing , product costs can include manufacturing and non-manufacturing costs.

• True

• False

Answer explanation

Answer: False.

Explanation: In absorption costing, non-manufacturing costs include costs such as Selling, General and Administrative expenses and are classified as period costs.

10) Under Activity Based Costing, some manufacturing overhead cost may not be a product cost.

• True

• False

Answer explanation

Answer: True.

Explanation: Under ABC, whether indirect overheads are classified as product or period cost will be dependent on the cause and effect relationship with the product cost,  If cost are incurred for the development of the product FOR the customer -> Product cost. 

Similarly, some manufacturing overheads may NOT be product cost.