Question

Which terms would make the following sentence true? Manufacturing companies that benefit the most from activity-based costing are those where overhead costs are a _________ percentage of total product cost and where there is ___________ diversity among the various products that they produce.

a) low, little
b) low, considerable
c) high, little
d) high, considerable

Answer 1

The correct terms to complete the given sentence about activity-based costing are 'high' and 'considerable.' This costing method works well for companies with a diverse product line and significant overhead costs.

Manufacturing companies that benefit the most from activity-based costing are those where overhead costs are a high percentage of total product cost and where there is considerable diversity among the various products that they produce. Activity-based costing is most effective when overhead costs are substantial because it allows for a more accurate tracing and assignment of these costs to specific products based on the actual activities involved in production.

Furthermore, with a considerable diversity in products, activity-based costing helps in identifying the true production costs of each product, which could be obscured if a uniform overhead rate were applied.

So, the correct terms to complete the sentence are high and considerable. Activity-based costing offers a nuanced approach to allocating costs in companies with a diverse product range and significant overhead, leading to better decision-making on pricing, product focus, and process improvements.