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CA Intermediate · Cost and Management Accounting · Activity Based Costing

Which one of the following is a typical feature of an activity-based costing system when compared with a traditional absorption costing system?

ABC uses multiple cost drivers, many of which are unrelated to production volume, such as set-ups, orders or inspections. Traditional costing instead uses a single or few volume-based rates such as direct labour hours, which can distort product costs for low-volume, complex products.

  1. AIt uses multiple cost drivers, many unrelated to production volumeCorrect
  2. BIt absorbs all overheads using a single plant-wide rate
  3. CIt ignores non-production overheads entirely
  4. DIt assumes all overheads vary with direct labour hours

Explanation

ABC identifies activities and uses several cost drivers, many of which are not volume-related, such as set-ups or inspections. Single plant-wide rates and the labour-hour assumption describe traditional costing. ABC does not ignore non-production overheads.

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