Question

Scarlet Company has clients that are not the same. The production department is required to use different sets of activities to handle different clients. To extend the activity-based budgeting process to ensure the same, the company could add:

a. Overhead Costs
b. Variable Costs
c. Cost Pools
d. Fixed Costs

Answer 1

To incorporate unique requirements for different clients into activity-based budgeting, Scarlet Company can add cost pools. Cost pools collect overhead costs related to specific activities, allowing for more accurate cost allocation.

Step-by-step explanation:

The question presented by the student indicates that Scarlet Company utilizes an activity-based budgeting process which requires different activities for handling various clients. To address the unique requirements of each client through the budgeting process, the company could add cost pools. Cost pools are a method of accumulating indirect costs (overheads) related to a particular activity or process, thus allowing for more accurate allocation of these costs to the products or services that are causing them.

Fixed costs, such as rent on a factory or machinery costs, are static and do not fluctuate with production levels. Therefore, they are generally not split into cost pools. On the other hand, variable costs do change with production levels but are typically not aggregated into cost pools either. Instead, cost pools are most closely related to overheads, which can vary by activity and are applied through an activity-based costing system to provide more precise cost information.