Understanding Activity-based Costing

What is the primary purpose of Activity-based Costing (ABC)?

• To allocate costs based on the number of employees

• To allocate costs based on activities that drive costs

• To allocate costs based on the size of the company

• To allocate costs based on the company's revenue

Answer explanation

The primary purpose of Activity-based Costing (ABC) is to allocate costs based on activities that drive costs, providing a more accurate reflection of resource usage compared to other methods.

Which of the following is a key benefit of using Activity-based Costing?

• It simplifies the accounting process

• It provides more accurate cost information

• It reduces the need for financial reporting

• It increases the company's revenue

Answer explanation

Activity-based Costing provides more accurate cost information by assigning costs to specific activities, allowing for better decision-making and resource allocation.

How does Activity-based Costing help in cost control?

• By increasing production volume

• By identifying cost drivers and managing them

• By reducing the number of employees

• By increasing the price of products

Answer explanation

Activity-based Costing helps in cost control by identifying cost drivers, which are the factors that cause costs to increase. By managing these drivers, organizations can reduce unnecessary expenses and improve overall efficiency.

Which of the following is a method of cost allocation in ABC?

• Allocating costs based on square footage

• Allocating costs based on activity levels

• Allocating costs based on employee salaries

• Allocating costs based on product weight

Answer explanation

In Activity-Based Costing (ABC), costs are allocated based on activity levels, which reflect the actual consumption of resources by different activities, making it a more accurate method than the other options.

What is the first step in implementing Activity-based Costing?

• Identifying cost drivers

• Identifying activities

• Allocating costs

• Calculating profitability

Answer explanation

The first step in implementing Activity-based Costing is identifying activities. This involves determining the various tasks and processes that consume resources, which is essential for accurately assigning costs.

Which of the following is an example of an activity in Activity-based Costing?

• Paying salaries

• Machine setup

• Selling products

• Receiving payments

Answer explanation

Machine setup is an example of an activity in Activity-based Costing, as it directly relates to the resources consumed in the production process. The other options are more general operational tasks.

How does Activity-based Costing assist in profitability analysis?

• By increasing the selling price of products

• By providing detailed cost information for each product

• By reducing the cost of raw materials

• By increasing the number of products sold

Answer explanation

Activity-based Costing provides detailed cost information for each product, allowing businesses to analyze profitability more accurately by identifying which products are truly profitable and which are not.

Which of the following is a cost control technique in ABC?

• Increasing production hours

• Reducing the number of activities

• Managing cost drivers effectively

• Increasing the workforce

Answer explanation

Managing cost drivers effectively is a key technique in Activity-Based Costing (ABC) as it focuses on controlling costs by understanding and influencing the factors that drive those costs.

What is a cost driver in the context of Activity-based Costing?

• A factor that causes a change in the cost of an activity

• A person responsible for managing costs

• A machine used in production

• A financial report

Answer explanation

A cost driver is a factor that influences the cost of an activity in Activity-based Costing. It helps identify what causes costs to change, making the correct choice "A factor that causes a change in the cost of an activity."

Which of the following is NOT a benefit of Activity-based Costing?

• Improved cost accuracy

• Better decision-making

• Simplified accounting processes

• Enhanced cost control

Answer explanation

Activity-based Costing improves cost accuracy, decision-making, and cost control, but it does not simplify accounting processes. In fact, it often adds complexity due to detailed tracking of activities.