Activity-Based Costing
Module 4:
Inventory & Costing
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
True or False
ABC uses multiple cost drivers
➛ True
Traditional costing is always more accurate than ABC
➛ False
ABC is generally more accurate, especially for complex production.
Activities consume resources
➛ True
Cost drivers cause costs
➛ True
Fill in the Blanks
1. ABC stands for Activity-Based Costing
2. A cost driver is a cause / driver of cost
3. Costs are grouped into cost pools
4. ABC improves accuracy of costing
Calculation Practice
A company has
Inspection cost =
Total inspections =
A product uses =
Total inspections =
A product uses =
$40,000
200
25 inspections.
200
25 inspections.
➛ Calculate cost driver rate
➛ Allocate cost to the product
Step 1
Cost Driver Rate
40,000 ÷ 200 = 200
$200 per inspection
Step 2
Allocate Cost
25 × 200 = 5,000
Final Answer
Cost driver rate =
Allocated cost =
Allocated cost =
$200 per inspection
$5,000
$5,000
Comparison
State whether the situation favors ABC or Traditional Costing
Situation
Simple production with identical products
Complex production with multiple activities
Company wants high accuracy in costing
Small business with limited resources
Simple production with identical products
Complex production with multiple activities
Company wants high accuracy in costing
Small business with limited resources
Best Method
Traditional Costing
ABC
ABC
Traditional Costing
Traditional Costing
ABC
ABC
Traditional Costing
Mini Case Study | Model Answers
A company produces two products: one simple and one complex. Traditional costing shows both products have similar costs, but management suspects inaccuracies.
Questions
Why might traditional costing be misleading?
➛ It uses a single allocation base, which may not reflect actual resource usage.
How can ABC improve accuracy?
➛ By allocating costs based on multiple activities and cost drivers.
Which product is likely undercosted?
➛ The complex product | uses more activities but gets less cost under traditional methods.
How can ABC improve decision-making?
➛ It provides accurate product costs, helping with pricing, cost control, and profitability analysis.
Quick Quiz
What is Activity-Based Costing?
➛ A method that assigns costs based on activities.
What is a cost driver?
➛ A factor that causes a cost to occur.
How is cost driver rate calculated?
➛ Total cost ÷ total activity units.
Why is ABC more accurate than traditional costing?
➛ Because it uses multiple cost drivers reflecting actual resource usage.
Name one limitation of ABC
➛ It is complex, costly, and time-consuming to implement.
Overhead Allocation ➧ Here