Activity-Based Costing (ABC) MCQ Quiz - Objective Question with Answer for Activity-Based Costing (ABC) - Download Free PDF

Important Points

Statement A: B-items are the interclass items, with a medium consumption value.

This statement is correct.

• In ABC analysis, B-items are classified as interclass items that have a moderate consumption value.
• These items fall between the high-value A-items and the low-value C-items in terms of their significance or contribution to the overall value.

Statement B: ABC ranks data on the basis of rank.

This statement is correct.

• ABC analysis ranks the data based on the rank of items.
• The items are classified into different categories (A, B, and C) based on their ranking, with A being the highest rank and C being the lowest rank.
• This ranking helps in identifying and prioritizing items based on their value or importance.

Statement C: A list is not the most valuable items.

This statement is incorrect.

• A-list refers to the items that are considered the most valuable or significant in ABC analysis.
• These items have a high consumption value or contribute significantly to the overall value.
• Therefore, the correct statement should be that the A-list represents the most valuable items in ABC analysis. 

Mistake Points The Official question paper gives the answer as Option 2 but the correct answer to this question must be option 3. Hence, it has been updated. 

Important Points

Statement A: B-items are the interclass items, with a medium consumption value.

This statement is correct.

• In ABC analysis, B-items are classified as interclass items that have a moderate consumption value.
• These items fall between the high-value A-items and the low-value C-items in terms of their significance or contribution to the overall value.

Statement B: ABC ranks data on the basis of rank.

This statement is correct.

• ABC analysis ranks the data based on the rank of items.
• The items are classified into different categories (A, B, and C) based on their ranking, with A being the highest rank and C being the lowest rank.
• This ranking helps in identifying and prioritizing items based on their value or importance.

Statement C: C being the least valuable ones.

This statement is correct.

• In ABC analysis, C-items represent the least valuable items in terms of their contribution or significance.
• These items generally have lower consumption value or impact on the overall value compared to A and B items.
• They are typically less critical or have lower priority in terms of resource allocation or management attention.

Statement D: A list is not the most valuable items.

This statement is incorrect.

• A-list refers to the items that are considered the most valuable or significant in ABC analysis.
• These items have a high consumption value or contribute significantly to the overall value.
• Therefore, the correct statement should be that the A-list represents the most valuable items in ABC analysis. 

Mistake Points The Official question paper gives the answer as Option 2 but the correct answer to this question must be option 4. Hence, it has been updated. 

Litt in one of his articles commented, “Activity-based costing (ABC) is an accounting technique that utilizes cost attachment rather than cost allocation to determine the actual cost of products and services”.

1. The real beauty of an ABC model is that it forces organizations to adopt a cost management paradigm that focuses on understanding their processes.
2. Once an organization accepts this paradigm, they soon recognize that their products or services are produced through cross-functional business processes.
3. These processes contain a wide variety of activities that not only define the process but also, more importantly, reflect how effectively the process performs.
4.  It is based on the fact that cost objects consume activities and activities consume resources. It is this consumption of resources that drives costs. 

The ABC can be performed by:

1. Identifying activities
2. Determining the cost for each activity/ Collecting cost pools
3. Determining cost drivers (Cost drivers are the factors that affect the cost of an activity, e.g. poor quality)
4. Collecting activity data and computing activity rate using activity drivers
5. Calculating product cost by charging the cost to products

Thus, option 3 is the correct answer.

The correct answer is ​Time-driven Activity-based Costing (TDABC).

Additional Information

• In CRM, ​Customer Profitability Management (CPM) focuses on an organization’s most profitable customers and products with the aim of improving “bottom line” performance.
• Customer profitability management is a strategy-linked approach to identifying the relative profitability of different customer segments in order to devise strategies that add value to most-profitable customers, make less-profitable customers more profitable, stop or reduce the erosion of profit by unprofitable customers, or otherwise focus on long-term customer profitability.
• Often the small percentage of customers generate substantially more than 100% of profits, and the remaining customers are either breakeven or unprofitable.
• The backbone of a CPM system is a costing system that focuses on tracing and assigning costs to every customer segment without arbitrary broadly averaged cost allocations.
• The major challenge in implementing a CPM system is the selection and implementation of an accurate and informative costing system.
• Cost accuracy and visibility are important in CPM.
• Using time-driven activity-based costing provides costs that identify resource consumption by customers or customer segments.
• The signals provided by the CPM system, based on the full costing of traceable costs to customers and making visible business-sustaining costs, will lead management to consider strategies to increase profits.
• The signals could even lead to generating alternative courses of action.

Important Points

Statement A: B-items are the interclass items, with a medium consumption value.

This statement is correct.

• In ABC analysis, B-items are classified as interclass items that have a moderate consumption value.
• These items fall between the high-value A-items and the low-value C-items in terms of their significance or contribution to the overall value.

Statement B: ABC ranks data on the basis of rank.

This statement is correct.

• ABC analysis ranks the data based on the rank of items.
• The items are classified into different categories (A, B, and C) based on their ranking, with A being the highest rank and C being the lowest rank.
• This ranking helps in identifying and prioritizing items based on their value or importance.

Statement C: C being the least valuable ones.

This statement is correct.

• In ABC analysis, C-items represent the least valuable items in terms of their contribution or significance.
• These items generally have lower consumption value or impact on the overall value compared to A and B items.
• They are typically less critical or have lower priority in terms of resource allocation or management attention.

Statement D: A list is not the most valuable items.

This statement is incorrect.

• A-list refers to the items that are considered the most valuable or significant in ABC analysis.
• These items have a high consumption value or contribute significantly to the overall value.
• Therefore, the correct statement should be that the A-list represents the most valuable items in ABC analysis. 

Mistake Points The Official question paper gives the answer as Option 2 but the correct answer to this question must be option 4. Hence, it has been updated. 

Litt in one of his articles commented, “Activity-based costing (ABC) is an accounting technique that utilizes cost attachment rather than cost allocation to determine the actual cost of products and services”.

1. The real beauty of an ABC model is that it forces organizations to adopt a cost management paradigm that focuses on understanding their processes.
2. Once an organization accepts this paradigm, they soon recognize that their products or services are produced through cross-functional business processes.
3. These processes contain a wide variety of activities that not only define the process but also, more importantly, reflect how effectively the process performs.
4.  It is based on the fact that cost objects consume activities and activities consume resources. It is this consumption of resources that drives costs. 

The ABC can be performed by:

1. Identifying activities
2. Determining the cost for each activity/ Collecting cost pools
3. Determining cost drivers (Cost drivers are the factors that affect the cost of an activity, e.g. poor quality)
4. Collecting activity data and computing activity rate using activity drivers
5. Calculating product cost by charging the cost to products

Thus, option 3 is the correct answer.

Therefore, the method used to assess real cost of providing services to an individual customer is Activity-based accounting.

The correct answer is Cause and effect relationship

Key Points Activity Based Costing:

• ABC is an accounting technique that allocates expenses to activities rather than products or services.
• This allows for more precise allocation of resources and overhead expenses to the products and services that consume them.
• ABC is a cause-and-effect approach for assigning the cost of items, services, consumers, or any other cost object.

Important Points Objectives of Activity Based Costing:

• To bring more accuracy in calculation of cost of products and services as compared to the traditional costing system, since not all items are manufactured identically,
• To understand product and customer cost.
• To gain a better understanding of profitability based on the manufacturing or performance processes.
• To have a structured analysis in respect of complex processes
• To offer management with a wealth of information to aid in decision-making.
• To eliminate non-value adding activities due to diversity of products.
• To increase value adding activities since diversity of customer demands are growing rapidly.

The correct answer is ​Time-driven Activity-based Costing (TDABC).

Additional Information

• In CRM, ​Customer Profitability Management (CPM) focuses on an organization’s most profitable customers and products with the aim of improving “bottom line” performance.
• Customer profitability management is a strategy-linked approach to identifying the relative profitability of different customer segments in order to devise strategies that add value to most-profitable customers, make less-profitable customers more profitable, stop or reduce the erosion of profit by unprofitable customers, or otherwise focus on long-term customer profitability.
• Often the small percentage of customers generate substantially more than 100% of profits, and the remaining customers are either breakeven or unprofitable.
• The backbone of a CPM system is a costing system that focuses on tracing and assigning costs to every customer segment without arbitrary broadly averaged cost allocations.
• The major challenge in implementing a CPM system is the selection and implementation of an accurate and informative costing system.
• Cost accuracy and visibility are important in CPM.
• Using time-driven activity-based costing provides costs that identify resource consumption by customers or customer segments.
• The signals provided by the CPM system, based on the full costing of traceable costs to customers and making visible business-sustaining costs, will lead management to consider strategies to increase profits.
• The signals could even lead to generating alternative courses of action.

Important Points

Statement A: B-items are the interclass items, with a medium consumption value.

This statement is correct.

• In ABC analysis, B-items are classified as interclass items that have a moderate consumption value.
• These items fall between the high-value A-items and the low-value C-items in terms of their significance or contribution to the overall value.

Statement B: ABC ranks data on the basis of rank.

This statement is correct.

• ABC analysis ranks the data based on the rank of items.
• The items are classified into different categories (A, B, and C) based on their ranking, with A being the highest rank and C being the lowest rank.
• This ranking helps in identifying and prioritizing items based on their value or importance.

Statement C: C being the least valuable ones.

This statement is correct.

• In ABC analysis, C-items represent the least valuable items in terms of their contribution or significance.
• These items generally have lower consumption value or impact on the overall value compared to A and B items.
• They are typically less critical or have lower priority in terms of resource allocation or management attention.

Statement D: A list is not the most valuable items.

This statement is incorrect.

• A-list refers to the items that are considered the most valuable or significant in ABC analysis.
• These items have a high consumption value or contribute significantly to the overall value.
• Therefore, the correct statement should be that the A-list represents the most valuable items in ABC analysis. 

Mistake Points The Official question paper gives the answer as Option 2 but the correct answer to this question must be option 4. Hence, it has been updated. 

Litt in one of his articles commented, “Activity-based costing (ABC) is an accounting technique that utilizes cost attachment rather than cost allocation to determine the actual cost of products and services”.

1. The real beauty of an ABC model is that it forces organizations to adopt a cost management paradigm that focuses on understanding their processes.
2. Once an organization accepts this paradigm, they soon recognize that their products or services are produced through cross-functional business processes.
3. These processes contain a wide variety of activities that not only define the process but also, more importantly, reflect how effectively the process performs.
4.  It is based on the fact that cost objects consume activities and activities consume resources. It is this consumption of resources that drives costs. 

The ABC can be performed by:

1. Identifying activities
2. Determining the cost for each activity/ Collecting cost pools
3. Determining cost drivers (Cost drivers are the factors that affect the cost of an activity, e.g. poor quality)
4. Collecting activity data and computing activity rate using activity drivers
5. Calculating product cost by charging the cost to products

Thus, option 3 is the correct answer.

The correct answer is - trends to increase the number of cost pools

Key Points

• Activity-based costing (ABC)
  • ABC is a costing methodology that allocates overhead costs to products and services based on the activities driving those costs.
  • It provides a more accurate cost allocation by identifying multiple cost pools and assigning costs to products based on their actual consumption of activities.
• Increase in cost pools
  • ABC typically involves creating multiple activity-specific cost pools (e.g., machine setup, quality inspection, packaging) instead of using a single overhead pool.
  • This approach ensures that costs are allocated more precisely, reflecting the resource usage for each activity.
  • For example, a company may establish separate cost pools for activities like "machine maintenance" and "product design" rather than combining them into a single overhead pool.
• Improved decision-making
  • By increasing the number of cost pools, ABC provides managers with better insights into the drivers of costs, enabling more informed pricing, budgeting, and operational decisions.

Additional Information

• Comparison with traditional costing
  • Traditional costing systems often use a single, broad overhead allocation base, such as direct labor hours or machine hours.
  • In contrast, ABC uses multiple activity drivers (e.g., number of setups, inspection hours) to allocate costs more accurately.
  • This makes ABC especially useful in environments with complex production processes or diverse product lines.
• Applications of ABC
  • ABC can be applied in both job order costing and process costing systems, making it versatile across industries.
  • It is particularly beneficial in industries with high indirect costs or where overheads constitute a significant portion of total costs.
• Key challenges of ABC
  • Implementing ABC can be time-consuming and expensive due to the need to identify and measure multiple activities and cost drivers.
  • Organizations must ensure the accuracy of data used in ABC to achieve reliable cost information.

The correct answer is ​Time-driven Activity-based Costing (TDABC).

Additional Information

• In CRM, ​Customer Profitability Management (CPM) focuses on an organization’s most profitable customers and products with the aim of improving “bottom line” performance.
• Customer profitability management is a strategy-linked approach to identifying the relative profitability of different customer segments in order to devise strategies that add value to most-profitable customers, make less-profitable customers more profitable, stop or reduce the erosion of profit by unprofitable customers, or otherwise focus on long-term customer profitability.
• Often the small percentage of customers generate substantially more than 100% of profits, and the remaining customers are either breakeven or unprofitable.
• The backbone of a CPM system is a costing system that focuses on tracing and assigning costs to every customer segment without arbitrary broadly averaged cost allocations.
• The major challenge in implementing a CPM system is the selection and implementation of an accurate and informative costing system.
• Cost accuracy and visibility are important in CPM.
• Using time-driven activity-based costing provides costs that identify resource consumption by customers or customer segments.
• The signals provided by the CPM system, based on the full costing of traceable costs to customers and making visible business-sustaining costs, will lead management to consider strategies to increase profits.
• The signals could even lead to generating alternative courses of action.

Activity-based costing trends to increase the number of cost pools.

1. Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services.
2.  This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods.
3. However, some indirect costs, such as management and office staff salaries, are difficult to assign to a product.
4. Activity-based costing (ABC) is mostly used in the manufacturing industry since it enhances the reliability of cost data, hence producing nearly true costs and better classifying the costs incurred by the company during its production process.
5. This costing system is used in target costing, product costing, product line profitability analysis, customer profitability analysis, and service pricing.
6. The formula for activity-based costing is the cost pool total divided by cost driver, which yields the cost driver rate.
7. The cost driver rate is used in activity-based costing to calculate the amount of overhead and indirect costs related to a particular activity. 

The ABC calculation is as follows:  

1. Identify all the activities required to create the product. 
2. Divide the activities into cost pools, which include all the individual costs related to an activity—such as manufacturing. Calculate the total overhead of each cost pool.
3. Assign each cost pool activity cost driver, such as hours or units. 
4. Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers. 
5. Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate. 
6. Multiply the cost driver rate by the number of cost drivers. 

Important Points

Statement A: B-items are the interclass items, with a medium consumption value.

This statement is correct.

• In ABC analysis, B-items are classified as interclass items that have a moderate consumption value.
• These items fall between the high-value A-items and the low-value C-items in terms of their significance or contribution to the overall value.

Statement B: ABC ranks data on the basis of rank.

This statement is correct.

• ABC analysis ranks the data based on the rank of items.
• The items are classified into different categories (A, B, and C) based on their ranking, with A being the highest rank and C being the lowest rank.
• This ranking helps in identifying and prioritizing items based on their value or importance.

Statement C: A list is not the most valuable items.

This statement is incorrect.

• A-list refers to the items that are considered the most valuable or significant in ABC analysis.
• These items have a high consumption value or contribute significantly to the overall value.
• Therefore, the correct statement should be that the A-list represents the most valuable items in ABC analysis. 

Mistake Points The Official question paper gives the answer as Option 2 but the correct answer to this question must be option 3. Hence, it has been updated.