Question

Activity Based Costing (ABC) is a technique to allocate indirect costs to cost objects based on activities that cause the cost to occur. It is more accurate than traditional cost allocation.

True Or False

Answer 1

• Yes the statement is TRUE.
• ABC technique is more accurate than traditional cost allocation.
• This is mostly because of the fact that under Traditional cost allocation method, a single allocation base (like direct labor hours, machine hours) are taken for determining allocation overhead rate.

This does not justifies the allocation because their can be instances where the cost that has been allocated based on direct labor hour or machine hour is not at all depended on labor hours or machine hours But it is based on some other activity cost driver.

• Hence, ABC method overcomes this problem as it allocates overheads to cost objects based on activities that cause the cost to occur. Overheads are divided into cost pool activity and different rates for difference cost pool activity is calculated to allocate the overheads.