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?

    <p>Shifts some fixed costs to the finished goods account (B)</p> Signup and view all the answers

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

    <p>Creates a bias towards overproduction (B)</p> Signup and view all the answers

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

    <p>Incentive for managers to overproduce (A)</p> Signup and view all the answers

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

    <p>Leads to higher total variable costs initially (B)</p> Signup and view all the answers

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

    <p>Increased total fixed costs in the long run (C)</p> Signup and view all the answers

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

    <p>Inaccurate reflection of production costs (A)</p> Signup and view all the answers

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

    <p>Increases inventory, leads to declining production, and increases costs (A)</p> Signup and view all the answers

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