Q.1 What does Activity Based Costing (ABC) primarily focus on?
Departments
Cost Centers
Activities
Products
Explanation - ABC assigns costs to activities and then to products based on their usage of those activities.
Correct answer is: Activities
Q.2 Which of the following is a key advantage of ABC?
Simplicity in accounting
More accurate product costing
Lower data requirements
No need for cost drivers
Explanation - ABC provides more accurate costing by identifying activities and their related cost drivers.
Correct answer is: More accurate product costing
Q.3 In ABC, cost drivers are used to:
Eliminate overheads
Assign costs to activities
Increase profit margins
Reduce production time
Explanation - Cost drivers measure the factors that cause activities to consume resources, helping allocate costs accurately.
Correct answer is: Assign costs to activities
Q.4 Which of these is an example of a cost driver?
Direct labor hours
Selling price
Finished goods inventory
Profit margin
Explanation - Direct labor hours can be a cost driver for labor-intensive activities.
Correct answer is: Direct labor hours
Q.5 ABC differs from traditional costing mainly in:
How direct costs are assigned
The treatment of fixed costs
The allocation of overheads
Recording of revenues
Explanation - Traditional costing allocates overhead broadly, while ABC allocates based on activities and cost drivers.
Correct answer is: The allocation of overheads
Q.6 Which type of costs are most accurately traced in ABC?
Direct material costs
Overhead costs
Sales expenses
Cash discounts
Explanation - ABC helps in better allocation of overheads which are difficult to allocate in traditional systems.
Correct answer is: Overhead costs
Q.7 Which of the following industries is most likely to benefit from ABC?
Retail shop
Simple manufacturing
Complex manufacturing
Agriculture
Explanation - Industries with complex processes and high overheads benefit most from ABC.
Correct answer is: Complex manufacturing
Q.8 What is the first step in ABC implementation?
Identify cost drivers
Identify activities
Assign costs to products
Prepare financial statements
Explanation - The ABC process begins with identifying the major activities within the organization.
Correct answer is: Identify activities
Q.9 Which of these is NOT a level of activity in ABC?
Unit-level
Batch-level
Product-level
Market-level
Explanation - ABC recognizes unit, batch, product, and facility-level activities, but not market-level.
Correct answer is: Market-level
Q.10 Batch-level activities are performed:
For each unit
For each batch
For the whole facility
For each customer
Explanation - Batch-level activities support a batch of products rather than individual units.
Correct answer is: For each batch
Q.11 Facility-level activities are those that:
Support the entire organization
Relate to one product line
Relate to each batch
Relate to customer orders
Explanation - Facility-level activities provide support for the entire facility rather than specific products.
Correct answer is: Support the entire organization
Q.12 Which of the following is an example of product-level activity?
Machine setup
Product design
Quality inspection per unit
Factory rent
Explanation - Product-level activities like product design support a product line, not individual units.
Correct answer is: Product design
Q.13 What is the ultimate goal of ABC?
Reduce labor costs
Improve accuracy of cost information
Lower taxes
Eliminate financial reporting
Explanation - ABC aims to provide better cost information for decision-making.
Correct answer is: Improve accuracy of cost information
Q.14 ABC is particularly useful in businesses where:
Overheads are minimal
Overheads are significant
There are only direct costs
No allocation is needed
Explanation - When overheads form a large part of total cost, ABC helps in accurate allocation.
Correct answer is: Overheads are significant
Q.15 Which is an example of a unit-level activity?
Machine setup
Assembly of one product
Product design
Building maintenance
Explanation - Unit-level activities are performed for each unit produced, like assembly.
Correct answer is: Assembly of one product
Q.16 The concept of ABC was developed to overcome the limitations of:
Direct costing
Traditional absorption costing
Marginal costing
Standard costing
Explanation - ABC was introduced to correct inaccuracies of overhead allocation in absorption costing.
Correct answer is: Traditional absorption costing
Q.17 Which of the following is a disadvantage of ABC?
Improved accuracy
Complexity in implementation
Better decision-making
Detailed cost tracing
Explanation - ABC is more accurate but requires significant effort and resources to implement.
Correct answer is: Complexity in implementation
Q.18 In ABC, activities consume ______, and products consume ______.
Costs; activities
Resources; activities
Activities; resources
Units; costs
Explanation - In ABC, resources are consumed by activities, and activities are consumed by products.
Correct answer is: Resources; activities
Q.19 Which of the following could be a facility-level cost driver?
Number of units
Number of machine setups
Number of product lines
Square footage of plant
Explanation - Facility-level costs like rent can be driven by the plant’s square footage.
Correct answer is: Square footage of plant
Q.20 ABC provides more useful cost information for:
Short-term pricing only
Strategic decision making
External reporting
Tax compliance
Explanation - ABC is mainly for internal decision making, especially in strategy and pricing.
Correct answer is: Strategic decision making
Q.21 Which of these would NOT typically be considered an activity in ABC?
Machine maintenance
Product design
Direct material purchase
Profit calculation
Explanation - Profit calculation is not an operational activity; it's a result of operations.
Correct answer is: Profit calculation
Q.22 The two main stages in ABC allocation are:
Identify cost objects and assign costs
Assign resources to activities and then to cost objects
Allocate direct costs and then indirect costs
Prepare budgets and allocate costs
Explanation - ABC first assigns resources to activities, then activities to cost objects.
Correct answer is: Assign resources to activities and then to cost objects
Q.23 Which accounting standard mandates the use of ABC?
IFRS
GAAP
None
IAS 2
Explanation - ABC is not mandated by accounting standards; it is used as an internal tool.
Correct answer is: None
Q.24 Which of these activities would be batch-level?
Quality testing of each unit
Machine setup for a batch
Factory rent
Product design
Explanation - Machine setups are performed once per batch, making it a batch-level activity.
Correct answer is: Machine setup for a batch
Q.25 ABC improves decision making mainly by:
Providing accurate cost per activity
Simplifying bookkeeping
Eliminating overheads
Increasing profits directly
Explanation - ABC shows the cost of each activity, leading to more informed decisions.
Correct answer is: Providing accurate cost per activity