Question

In service companies, activity-based management ________.

1.is used to estimate total direct costs

2.uses one predetermined overhead allocation rate for all service activities

3.follows different steps than in a manufacturing environment

4.results in more accurate cost per service information

Answer 1

Unlike manufacturing where invetory and direct costs are a major part of cost for product, Cost of Service is more difficult to estimate due to number of overheads involved.

Because ABC costing is able to identify more accurately which overheads relate to which service with the help of different cost drivers. Thus each cost pool is assigned with a cost driver that is most likley to affect that cost pool on the basis of which overheads are allocated and cost is calculate

Hence, ABC costing provides a more accurate cost per service information. (answer 4)