Question

Consider the following statements about activity-based costing and its use in pricing: I. A company that uses target costing generally would have little need for activity-based costing. II. Companies that use cost-plus pricing methods would have little need for activity-based costing. III. The use of activity-based costing will often lead to better pricing decisions by managers. Which of the above statements is (are) true?

Answer 1

Step-by-step explanation:

Let's analyze each of the statements:

I. "A company that uses target costing generally would have little need for activity-based costing."

This statement is not necessarily true. Target costing is a method used to determine the cost at which a product must be produced to meet specific profitability targets. Activity-based costing (ABC) is a method for allocating indirect costs to products or services based on the activities that drive those costs. ABC can provide valuable insights into where costs are incurred and help identify areas for cost reduction or process improvement. Companies using target costing might still find ABC useful for a more detailed understanding of their cost structure and to identify cost reduction opportunities.

II. "Companies that use cost-plus pricing methods would have little need for activity-based costing."

This statement is not true. Cost-plus pricing involves adding a markup to the cost of a product to determine its selling price. Activity-based costing can help companies accurately determine their product costs by assigning indirect costs to products based on the activities required to produce them. This, in turn, can lead to more accurate cost data for cost-plus pricing decisions.

III. "The use of activity-based costing will often lead to better pricing decisions by managers."

This statement is generally true. Activity-based costing provides a more accurate and detailed understanding of how costs are incurred in a company. With this information, managers can make more informed pricing decisions. By allocating costs to products or services based on the activities that drive those costs, ABC helps identify the true cost drivers and can lead to more precise pricing strategies. It allows for a better understanding of which products or services are profitable and which may need price adjustments.

So, statement III is true, while statements I and II are not necessarily true, as both target costing and cost-plus pricing methods can benefit from the insights provided by activity-based costing in various situations.