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A-B-C

Activity based costing

QuestionAnswer
What is ABC? It refines a costing system by identifying individual activities as the dundamental cost objects.
What can broad averaging lead to? It can lead to undercosting or overcosting of products or services.
What is termed as product undercosting? It occurs when a product consumes a HIGH LEVEL of RESOURCES but is reported to have a LOW COST PER UNIT.
What is termed as product overcosting? It occurs when a product consumes a LOW LEVEL of RESOURCES but is reported to have a HIGH COST PER UNIT
What are the strategic consequences of an undercosted product? It will result in product being UNDERPRICED and may even lead to sales that actually result in LOSSES.
Why does undercosted products net a lower profit than projected? It is due to sales bringing in lesser revenue than the cost of resources they use.
What does overcosted products lead to? It leads to overpricing, which cause products to lose market share to competitors producing similar products.
What does a refined costing system result in? It reduces the use of broad averages for assigning the cost of resources to cost objects/
What does a refined costing system provides? It provides better measurement of the costs of indirect resources used by different cost objects.
What is the difference between the design of a simple costing system and an ABC system? The ABC systen differs from the simple system by its fundamental focus on activities. The ABC system has more homogeneous indirect cost pools than the simple system, and more cost drivers are used as cost-allocation base.
When will ABC systems yield the most decision-making benefits? When indirect costs are a high percentage of total costs.
What are the main costs of ABC systems? It is the difficulty of the measurements necessary to implement and update the systems.
How is ABC used for management decision? It is used for pricing, product-mix, cost reduction, process improvement, product and process planning and decision making.
Created by: Malcolm1987