Question

Which of the following statements are true regarding Activity-Based Costing?

Select one:

A. Non-manufacturing costs are not important to include when calculating the cost of each product.

B. Costs are allocated based on a pre-determined overhead rate for each cost pool.

C. Transitioning from traditional costing methods to Activity-Based Costing is a relatively simple process that most companies complete quickly.

D. Activity-Based Costing results in a different amount of total overhead applied than under traditional costing methods.

E. None of the above

Answer 1

• The statement that is TRUE among all 4 statements regarding Activity Based Costing is—

Option ‘D’: Activity-Based Costing results in a different amount of total overhead applied than under traditional costing methods.

This is true. Amount applied using activity based rate and amount applied by traditional overhead rate will differ.

Activity Based Costing uses activity rates for each activity, where as Traditional Method uses a single allocation base for calculating the overhead rate at which the overheads are to be applied.

Hence, Final allocation under both the methods will be of different amounts.