Activity-Based Costing Q&A
Accounting Q&A · Cost and Management Accounting · Topic 7
Work through the questions, then reveal the answers to check your reasoning.
25 short-answer questions. Try each question before revealing its answer.
Worked example
Setup costs of 48,000 across 120 setups give a rate of 400 per setup. A product requiring eight setups receives 3,200 of setup cost.
Core concepts
1. What is activity-based costing?
A method that assigns resource costs to activities and then to cost objects based on their activity use.
2. What is an activity?
Work that consumes resources, such as testing or setting up a machine.
3. What is a cost pool?
A grouping of costs associated with an activity or similar activities.
4. What is a cost driver?
A factor used to explain or allocate the cost of an activity.
5. How does a resource driver differ from an activity driver?
A resource driver assigns resources to activities. An activity driver assigns activity cost to objects.
6. What is a unit-level activity?
Work performed for each unit, such as machining one component.
7. What is a batch-level activity?
Work performed for a batch, such as a setup.
8. What is a product-sustaining activity?
Work supporting a product line, such as maintaining its specifications.
9. What is a facility-sustaining activity?
Work supporting the overall facility, such as site security.
10. How do you calculate an activity rate?
Divide the cost pool by the relevant driver quantity.
Worked applications
11. An inspection pool is 30,000 for 600 inspections. What is the rate?
50 per inspection.
12. A job requires 12 inspections. What does it receive?
600 of inspection cost.
13. A job also requires three setups at 400. What is its total assigned overhead?
1,800 including the 600 inspection cost.
14. Why can a low-volume product be costly under ABC?
It can require many setups or engineering changes despite producing few units.
15. What is cross-subsidisation in product costing?
One product is assigned too much cost while another is assigned too little.
16. When can a single volume driver distort overhead?
When significant costs respond to batches or product complexity rather than volume.
17. What makes a good driver?
It has a plausible link to resource consumption and can be measured reliably.
18. What is a transaction driver?
It counts occurrences such as orders or setups.
19. What is a duration driver?
It measures the time spent, such as setup hours.
Review and exam practice
20. When is duration preferable to transaction counts?
When activities vary materially in how long they take.
21. What is unused capacity?
Available activity capacity that cost objects did not consume.
22. Why report unused capacity separately in a managerial model?
It helps distinguish the cost of available resources from resources consumed by products.
23. Does an ABC allocation always equal an avoidable cost?
A resource commitment may remain even if the product is dropped. Check which spending changes.
24. What limits ABC accuracy?
Outdated pools, weak drivers and unreliable activity data can distort results.
25. How do you validate an ABC model?
Reconcile costs to the ledger and test whether driver use matches operations.
