Question

Which of the following are part of the four-level hierarchy used in activity-based costing systems?

1) Cost drivers, cost pools, activity cost rates, and activity measures
2) Direct costs, indirect costs, fixed costs, and variable costs
3) Product costs, period costs, direct costs, and indirect costs
4) Variable costs, fixed costs, semi-variable costs, and step costs

Answer 1

The four-level hierarchy used in activity-based costing systems includes cost drivers, cost pools, activity cost rates, and activity measures, which all contribute to more accurately assigning costs to the activities and products that incur them.

Step-by-step explanation:

The four-level hierarchy used in activity-based costing systems consists of cost drivers, cost pools, activity cost rates, and activity measures. The methodology of Activity-Based Costing (ABC) enables more accurate allocation of costs to the products or services that actually consume them. This approach helps organizations gain better insights into which activities are generating costs and which products are profitable. Breaking down total costs into their components, such as fixed and variable costs, provides a foundation for understanding other measures like average total cost, average variable cost, and marginal cost. Fixed costs are associated with fixed inputs that do not change with the level of production, while variable costs fluctuate with production volume. Marginal cost represents the increase in total cost that arises from producing one additional unit of a product.