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Activity-Based Costing Basics

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Questions and Answers

What is one of the problems with absorption costing?

It allocates both variable and fixed costs to products

It leads to under-costed products

It encourages overproduction for higher profits (correct)

It accurately reflects short-term capacity decisions

In absorption costing, why does overproduction lead to lower total costs?

It shifts some fixed costs to the finished goods account on the balance sheet (correct)

It results in more accurate product costing

It requires lower variable costs in the long-term

It reduces the need for investments in production

Which costing method allocates all costs (variable and fixed) to products?

Job order costing

Process costing

Activity-based costing

Absorption costing (correct)

What impact does overproduction have on the balance sheet under absorption costing?

Shifts some fixed costs to the finished goods account Signup and view all the answers

What incentive does absorption costing create for managers in terms of production decisions?

Creates a bias towards overproduction Signup and view all the answers

What potential issue arises when managers' performance is evaluated based on total costs?

Incentive for managers to overproduce Signup and view all the answers

How does overproduction impact total variable costs in the short-term under absorption costing?

Leads to higher total variable costs initially Signup and view all the answers

What is a long-term consequence of overproduction under absorption costing?

Increased total fixed costs in the long run Signup and view all the answers

What is the main issue associated with overvalued stock due to overproduction under absorption costing?

Inaccurate reflection of production costs Signup and view all the answers

How does overproduction affect production needs and costs in the long run under absorption costing?

Increases inventory, leads to declining production, and increases costs Signup and view all the answers