CA Inter P4 · Chapter 5 · Question 6 of 8
Activity based costing is likely to give the greatest improvement in product cost accuracy over traditional absorption costing where:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Overheads are a large part of total cost and products differ in their use of support activities
Explanation
ABC traces overheads through activities and their cost drivers. Its benefit is greatest where overheads are significant and products consume activities in different proportions (for example low-volume products needing many set-ups). Where there is a single product or uniform production, a traditional volume-based rate gives similar results.
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