Question

Although activity-based costing helps refine the overhead costs, the cost may outweigh the benefits of activity-based costing. True or False

A) True
B) False

Answer 1

Activity-based costing can lead to a more accurate allocation of overhead costs, but it is true that its implementation may be costly and complex, which might outweigh its benefits. The correct option is A.

Step-by-step explanation:

True, although activity-based costing (ABC) can provide a more refined method of assigning overhead costs to products or services based on the activities that generate costs, it can be more costly and complex to implement and maintain. This sophistication could potentially outweigh the benefits for some businesses.

An important aspect of decision-making involves conducting a cost/benefit analysis which compares the costs and benefits to make an informed decision.

Specifically, in the context of adopting ABC, firms must weigh the additional granularity in cost allocation it provides against the added financial and administrative burden it entails. This could include increased personnel training, time spent on data collection, and the costs of new systems to track this information.