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Questions and Answers
What is the primary focus of Activity-Based Costing (ABC)?
How does ABC determine the cost of products?
What is a characteristic of traditional costing systems when compared to ABC systems?
What is the implication of the cause-and-effect relationship in ABC costing?
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What denotes the computational complexity of ABC systems?
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Study Notes
ABC vs. Traditional Costing Systems
- Activity Information: ABC provides detailed information about individual activities within a department, while traditional systems offer summarized cost information for entire functions.
- Focus: ABC focuses on activities as the main cost driver, whereas traditional systems use products or outputs as the driving factor.
- Cost Driver: ABC uses specific cost drivers for each activity, measured by the activity's outputs. Traditional systems employ a single overhead rate calculated by dividing total overhead costs by the volume of the cost driver.
- Allocation Basis: ABC utilizes multiple cost pools, each allocated to a specific activity. Traditional systems typically use a single cost pool for allocating overhead costs.
- Cause-and-Effect Relationship: ABC prioritizes a high probability that the cost driver directly influences the cost of an activity (for example, more cases lead to higher costs). Traditional systems' cause-and-effect relationship might be less reliable or precise.
- Cost Determination: ABC determines product costs by accumulating the costs of each activity contributing to the product. Traditional systems divide total costs by the total units of output to determine product costs.
- Computational Complexity: ABC calculations are advanced. Traditional systems allow for both manual and advanced calculations.
- ABC systems are more complex but provide more accurate cost determination than traditional systems.
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Description
This quiz explores the differences between Activity-Based Costing (ABC) and traditional costing systems. It highlights various aspects such as focus, cost drivers, allocation bases, and the cause-and-effect relationships that underpin these methodologies. Test your knowledge on how these systems operate within departments and their implications for cost management.
