Question

Do It! Review 4-1 Indicate whether the following statements are true or false. (a) The reasoning behind ABC cost allocation is that products consume activities and activities consume resources. (b) Activity-based costing is an approach for allocating direct labor to products. (c) In today's increasingly automated environment, direct labor is never an appropriate basis for allocating costs to products. (d) A cost driver is any factor or activity that has a direct cause-effect relationship with resources consumed. (e) Activity-based costing segregates overhead into various cost pools in an effort to provide more accurate cost information. Click If you would like to Show Work for this question: Open Show Work

Answer 1

Exercise 4-1

1. The Statement is True.

Yes the rationale behind the allocation of Activity Based Costing is that for a particular product or service there are many activities being performed which also consume various resources so it is always better to allocate the resources on their usage level rather than using a single allocation rate.

2. The Statement is False.

Activity Based Costing is an approach for systematic allocation of the organization to the various products or services provided rather than a source of allocation of Direct Labor.

3. The Statement is True.

For a particular product or service an organisation has to undergo various activities which may be related to direct Labour or not so Direct Labour as a single base cannot be taken as a sole measure to allocate overheads.

4. The Statement is True.

A cost driver is always that particular thing which has direct cause effect relationship with the activity cost pool. for example - Cost driver for Setup Costs is Number of Machine Setups.

5. The Statement is True.

The main aim of Activity Based Costing is to properly recognise the type of activity cost pools and then allocate them on the basis of their cost drivers so it is a more reliable measure for systematic and accurate allocation of overheads.

Exercise 4-3

1. Materials Handling - Number of Material Moves / Number of Material Requisition

2. Machine Setups - Number of Set-ups

3. Factory Maintenance Costs - Number of Machine Hours

4. Factory Supervision - Number of Employees

5. Quality Control - Number of Inspection / Number of Quality Test

There could be a multiple name for cost drivers as an organisation uses so please select correct answer on base of choice.