Chapter 3

Question 1

Explain 3 key differences between ABC Costing and Traditional Costing

Answer 1

• Under Activity Based Costing, some Nonmanufacturing costs may be assigned to inventory
• Under Activity Based Costing, some Manufacturing costs may not be assigned to inventory
• Under Activity Based Costing, numerous activity rates are used to assign OH to products

Question 2

Activity Based Costing is usually used as a ___ to the firm’s Traditional Based Costing system rather than a ___

Answer 2

ABC is used a SUPPLEMENT

rather than a Replacement

Question 3

2 Reasons you should use Activity Based Costing?

Answer 3

When 1 product requires a lot more resources than the other

When 1 product has more volume than the other

Question 4

2 Advantages of Activity Based Costing and 2 Disadvantages?

Answer 4

Advantages

• more accurate cost per unit
• better understanding of costs and therefor control of OH costs

Disadvantages

• expensive to implement and maintain
• ABC not perfect, allocation of some costs will always remain