Question

When comparing traditional overhead allocation to ABC: A) in the long run, ABC and traditional overhead allocation are about the same with respect to their complexity and expense B) ABC is more complex and more expensive to use C) ABC is less complex and less expensive to use D) None of these answers is correct.

Answer 1

ABC is more complex and more expensive to use. Option (B) is true.

Step-by-step explanation:

Traditional overhead allocation methods typically use broad metrics like direct labor hours or machine hours to allocate overhead costs to products or services.

These methods may oversimplify the allocation process and lead to inaccurate cost assignments, especially in environments where the relationship between overhead costs and production activities is complex and varied.

Activity-Based Costing (ABC), on the other hand, identifies and assigns costs to specific activities involved in the production process.

This allows for a more accurate distribution of overhead costs based on the actual drivers of those costs. While ABC provides better insights into cost structures, it often demands a more intricate and resource-intensive data collection process.

This increased complexity and the need for detailed data can make ABC more expensive to implement and maintain compared to traditional methods.

In summary, while ABC offers improved accuracy in cost allocation, it tends to be more complex and costly due to its requirement for a detailed understanding and measurement of activities and their associated costs.

Thus, option (B) is true.