Question 21

Indirect cost allocations will increase

Switching to the absorption costing method will result in an increase in indirect cost allocations. This method allocates all manufacturing costs, including both direct and indirect costs, to the product, which can lead to a more comprehensive reflection of total production costs.

A) Sales efficiency will increase

This option is incorrect because changing to absorption costing does not inherently lead to increased sales efficiency. Sales efficiency is more closely related to sales strategies and market conditions rather than the costing method used.

B) Indirect cost allocations will increase

This option is correct. Under absorption costing, the total manufacturing costs—including fixed and variable overhead—are allocated to products, which increases the overall indirect cost allocations compared to activity-based costing, which may assign costs based on specific activities.

C) Account development rate will increase

This option is incorrect as the account development rate is not directly influenced by the costing method. The rate is typically related to customer relationship management and sales strategies rather than the accounting practices employed.

D) Sales commission costs will decrease

This option is incorrect because the costing method does not directly affect sales commission costs. Sales commissions are typically based on sales volume or revenue generated, not on how costs are allocated within the company's accounting system.

Conclusion

The correct answer, indicating that indirect cost allocations will increase, highlights the fundamental difference between absorption costing and activity-based costing. While other options do not accurately reflect the implications of changing costing methods, understanding the nature of indirect cost allocation is crucial for businesses considering such a transition.