Question 11

Activity-based costing systems provide more precise overhead assignment when multiple products are manufactured.

Activity-based costing (ABC) systems are designed to allocate overhead costs more accurately by identifying the specific activities that drive costs. This is particularly beneficial when multiple products are produced, as it allows for a more tailored allocation of costs based on actual resource usage.

A) ABC is used with homogeneous products; traditional with heterogeneous

This statement is incorrect because ABC is particularly useful for heterogeneous products, where the diversity in production activities necessitates a more precise costing approach. Traditional costing systems tend to be used with homogeneous products, where overhead can be allocated more simply.

B) ABC uses a single cost driver; traditional uses multiple

This option is also incorrect. In fact, ABC typically employs multiple cost drivers to allocate overhead costs based on various activities, whereas traditional costing often uses a single cost driver, such as direct labor hours or machine hours, leading to less accurate overhead distribution.

C) ABC requires less time and expense to administer

This statement is misleading. ABC systems often require more time and expense to implement and maintain due to their complexity and the detailed data collection needed for accurate cost allocation. Traditional costing systems, being simpler, generally require less administrative effort.

D) ABC provides more precise overhead assignment when multiple products are manufactured

This is the correct answer. ABC enhances the accuracy of overhead cost assignments by focusing on the specific activities involved in the production of multiple products, leading to better decision-making and pricing strategies for businesses.

Conclusion

The correct answer, D, underscores the primary advantage of activity-based costing systems over traditional systems, particularly in environments with diverse products. Options A, B, and C fail to accurately reflect the characteristics and applications of ABC and traditional costing, highlighting the distinct strengths of ABC in managing complex cost structures.