Decision Making using Activity Based Costing
Activity-based costing (ABC) is a costing methodology that assigns costs to activities rather than to products or services. This can help businesses to make better decisions about pricing, product mix, and resource allocation.
Decisions that can be made using ABC
There are a number of decisions that can be made using ABC. Some of the most common decisions include:
- Pricing: ABC can be used to help businesses set prices that are more accurate and reflect the true costs of their products or services.
- Product mix: ABC can be used to help businesses determine the optimal product mix. The optimal product mix is the mix of products that maximizes profit.
- Resource allocation: ABC can be used to help businesses allocate resources more efficiently.
- Make-or-buy decisions: ABC can be used to help businesses decide whether to make a product or buy it from an outside supplier.
- Continue or discontinue decisions: ABC can be used to help businesses decide whether to continue to produce a product or discontinue it.
MCQs on Decision Making using Activity Based Costing
- Which of the following is not a benefit of using activity-based costing?
- It can help businesses to set more accurate prices.
- It can help businesses to determine the optimal product mix.
- It can help businesses to allocate resources more efficiently.
- It can help businesses to make better decisions about pricing, product mix, and resource allocation.
The answer is It can help businesses to make better decisions about pricing, product mix, and resource allocation. Activity-based costing is a tool that can help businesses to make better decisions, but it is not a guarantee that the decisions will be correct.
- Which of the following is a cost driver in activity-based costing?
- The number of units produced
- The number of machine hours used
- The number of customer orders
- All of the above.
The answer is All of the above. All of the costs listed are cost drivers in activity-based costing because they can cause costs to change.
Conclusion
Activity-based costing is a valuable tool for making better decisions. By understanding the costs of activities, businesses can make more informed decisions about how to allocate their resources.