Question

Which of the following statements is TRUE ?

Answers:	a. An activity-based costing system costs about the same amount as a traditional job-order costing system.
	b. None of the other statements is true.
	c. Activity-based costing systems allocate overhead costs directly from cost sources (e.g. factory lease cost, supervisor salary cost, etc.) to product units based on activity rates.
	d. All else being equal, activity-based costing is more likely to be profitable when the firm has fewer SG&A costs.

Answer 1

Activity based costing is a cost allocation method that allocates cost to individual products based on the extent of specified service used by that individual product i.e. based on the activity rates.
For example, Rent is allocated to products based upon the area used by them
Suppose there are 3 products A, B & C which used 200 sq m, 500 sq m and 300 sq m of the area respectively.
Total rent paid is $100,000
The activity rate shall be $100,000 / (200 + 500 + 300)
Activity rate = $100
Cost allocated to various products -
A - 200 * $100 = $20,000
B - 500 * $100 = $50,000
C- 300 * $100 = $30,000

Hence, cost is allocated based on activity rates.

Hence, the out of given statements, statement c) is TRUE.

answered by: anonymous