ABC Hierarchy - Limitations

The video tutorial explains activity-based costing (ABC), a method to allocate indirect costs to products or services. It highlights the ABC hierarchy, which involves identifying activities and assigning costs to production units. The tutorial discusses challenges like data collection and time consumption, and notes that ABC is mainly for internal use, not external reporting. It also addresses limitations, such as potential conflicts with existing budgeting methods and its suitability for organizations with significant overhead.

What is the primary goal of Activity-Based Costing (ABC)?

• To eliminate all overhead costs

• To assign indirect costs to production outputs

• To reduce direct costs

• To increase production speed

Which of the following is a challenge in implementing ABC?

• It is a mandatory external reporting measure

• Data collection and preparation can be costly and time-consuming

• It requires minimal time and cost

• It is easy to find data in regular financial reports

Why is ABC not suitable for external reporting?

• It is not a GAAP-accepted method

• It is too simple for external use

• It is universally accepted for all reporting

• It is only used for tax purposes

What might happen if ABC data conflicts with existing budgeting methods?

• ABC is always preferred

• The conflict is ignored

• The organization must choose one method to continue

• Both methods are used simultaneously

For which type of organization is ABC most suitable?

• Organizations with substantial overhead

• Small firms with low operating assets

• Organizations with minimal overhead

• Any organization regardless of size