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All questions of Activity Based Costing for B Com Exam

What is the primary advantage of using cost drivers in cost analysis?
  • a)
    Simplifying the cost calculation process
  • b)
    Reducing the need for financial reporting
  • c)
    Enabling accurate determination of product costs
  • d)
    Eliminating the need for budgeting
Correct answer is option 'C'. Can you explain this answer?


Primary Advantage of Using Cost Drivers in Cost Analysis:

Cost drivers play a crucial role in cost analysis as they enable the accurate determination of product costs. This is the primary advantage of using cost drivers in cost analysis. Below are the key points explaining this advantage:

Accurate Cost Determination:
- Cost drivers help allocate indirect costs to products or services based on the activities that actually drive those costs.
- By identifying and measuring the specific activities that consume resources, cost drivers provide a more accurate way to assign costs to products or services.
- This accurate cost determination helps businesses make informed decisions about pricing, product profitability, and cost control strategies.

Improved Cost Management:
- Cost drivers allow businesses to better understand the relationship between costs and activities, enabling them to identify areas where costs can be reduced or eliminated.
- By linking costs to specific activities, management can focus on improving efficiency and effectiveness in those areas, leading to overall cost savings.

Enhanced Decision-Making:
- With accurate product cost information provided by cost drivers, businesses can make informed decisions about product pricing, resource allocation, and product mix.
- This helps businesses optimize their operations, increase profitability, and stay competitive in the market.

In conclusion, the primary advantage of using cost drivers in cost analysis is the ability to accurately determine product costs, which in turn leads to improved cost management, enhanced decision-making, and ultimately, better financial performance for the business.
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Which step in ABC costing involves assigning costs to activity pools?
  • a)
    Activity Identification
  • b)
    Activity Analysis
  • c)
    Calculate Activity Rates
  • d)
    Assign Costs to Cost Objects
Correct answer is option 'D'. Can you explain this answer?

Dev Patel answered
Assigning costs to activity pools is part of the step known as "Assign Costs to Cost Objects" in the ABC costing process. This step involves allocating the accumulated costs in activity pools to specific cost objects, such as products or services.

Which of the following is NOT an example of a cost driver?
  • a)
    Number of Purchase Orders created
  • b)
    Number of Machine Set Ups
  • c)
    Machine Hours Run
  • d)
    Cost of Fuel
Correct answer is option 'D'. Can you explain this answer?

Dev Patel answered
The cost of fuel is not a cost driver but rather an expense itself. Cost drivers are factors that cause costs to be incurred, such as the number of purchase orders, machine setups, or machine hours, which directly influence the total cost of specific activities.

What is the primary focus of activity-based costing (ABC) when assigning costs to products?
  • a)
    Direct labor hours
  • b)
    Machine hours
  • c)
    Activity consumption
  • d)
    Volume-related activities
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
In ABC, the primary focus when assigning costs to products is on activity consumption. It considers the activities involved in producing a product and how they consume resources, leading to more accurate cost determination.

Which costing system has been developed to overcome the limitations of the traditional costing system?
  • a)
    Job costing
  • b)
    Process costing
  • c)
    Activity-based costing (ABC)
  • d)
    Standard costing
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
Activity-based costing (ABC) has been developed to overcome the limitations of the traditional costing system, as mentioned in the text. ABC is a modern approach that assigns overhead costs to products based on the activities required for their production.

Why is the traditional costing system considered less effective in today's competitive environment?
  • a)
    It relies on cost drivers.
  • b)
    It is based on activity consumption.
  • c)
    It was designed for mass production.
  • d)
    It provides an accurate picture of manufacturing efficiency.
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
The traditional costing system was designed for mass production, which is different from today's competitive environment where companies produce a wide variety of products with different cost structures. Hence, it is considered less effective.

In ABC costing, what is an activity cost pool?
  • a)
    A temporary account for fixed costs only
  • b)
    A fixed allocation of costs to all activities
  • c)
    A way to record the cumulative costs of a group of similar activities
  • d)
    A separate budget for each activity
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
An activity cost pool is a temporary account used in activity-based costing (ABC) to accumulate and total the costs associated with a specific group of similar activities. It includes both fixed and variable costs related to those activities, providing a more accurate representation of the costs incurred.

What is the primary focus of activity-based management (ABM) in ABC costing?
  • a)
    Reducing the number of cost drivers
  • b)
    Identifying cost pools
  • c)
    Managing activities to reduce costs
  • d)
    Eliminating variable costs
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
The primary focus of activity-based management (ABM) within ABC costing is to manage activities in a way that reduces costs. ABM aims to identify and improve the efficiency of activities, leading to cost reduction and better cost management.

Why is ABC costing particularly beneficial for organizations with diverse product lines?
  • a)
    It simplifies cost allocation.
  • b)
    It eliminates all fixed costs.
  • c)
    It provides accurate product cost data.
  • d)
    It focuses only on variable costs.
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
ABC costing is beneficial for organizations with diverse product lines because it provides accurate product cost data that takes into account the specific activities and resources required for each product. This accuracy is essential when dealing with a wide range of products with varying cost structures.

What is the key to the value of activity-based costing (ABC)?
  • a)
    Accurate cost allocation
  • b)
    Focus on cost reduction only
  • c)
    Management of fixed costs
  • d)
    Improved financial reporting
Correct answer is option 'A'. Can you explain this answer?

Dev Patel answered
The key to the value of activity-based costing (ABC) is accurate cost allocation. ABC ensures that costs are allocated to products or activities based on their actual consumption, leading to more precise cost information for better decision-making. This accuracy is crucial for cost management and competitive advantage.

What is a cost driver in the context of cost analysis?
  • a)
    A person responsible for calculating costs.
  • b)
    A factor with a cause and effect relationship with total cost.
  • c)
    A software used to manage financial data.
  • d)
    A type of machine used in manufacturing.
Correct answer is option 'B'. Can you explain this answer?

Dev Patel answered
A cost driver is a factor or variable that has a direct cause and effect relationship with the total cost of a particular activity or process. It determines how costs are incurred, and changes in the cost driver can lead to changes in the total cost. For example, in the context of running a car, the number of kilometers driven (cost driver) directly affects the total cost of fuel. Understanding cost drivers is essential for effective cost management and decision-making.

How does ABC costing benefit service organizations like banks and hospitals?
  • a)
    It simplifies cost allocation for them.
  • b)
    It eliminates all indirect costs.
  • c)
    It provides accurate cost data for decision-making.
  • d)
    It focuses only on direct labor costs.
Correct answer is option 'C'. Can you explain this answer?

Dev Patel answered
ABC costing benefits service organizations like banks and hospitals by providing accurate cost data that aids in decision-making. Since these organizations have complex cost structures, ABC helps them understand and manage costs more effectively.

What is the main advantage of using ABC costing in product pricing decisions?
  • a)
    Simplified cost calculations
  • b)
    Accurate allocation of overhead costs
  • c)
    Elimination of all fixed costs
  • d)
    Reduced focus on cost drivers
Correct answer is option 'B'. Can you explain this answer?

Dev Patel answered
One of the main advantages of using ABC costing in product pricing decisions is its ability to accurately allocate overhead costs to products based on their actual consumption of activities. This ensures that the pricing reflects the true cost structure, leading to more informed pricing decisions.

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Cost Management

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