Discussion
Activity Based Costing brings accuracy and reliability in product cost determination by focussing on ....................... in the cost incurrence.
Answer: A
Activity Based Costing focuses on the Cause and effect relationship in cost incurrence.
ABC first identifies the activities that consume resources (setting up machines, inspecting, handling orders) and the cost drivers that cause the cost of each activity to change. Overheads are then charged to products according to how much of each driver they use. Because costs are traced through what actually causes them, product costs are more accurate than under a single blanket rate.
Absorption, allocation and apportionment are the steps of the traditional method, where overheads are spread over departments and products on arbitrary bases such as labour hours. ABC was developed precisely to replace those arbitrary bases with causal ones.
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