Question

Activity-based costing is preferable in a system:

a. when multiple products have similar product volumes and costs
b. with a large direct labor cost as a percentage of the total product cost
c. with multiple, diverse products
d. where management needs to support an increase in sales price

Answer 1

c. with multiple, diverse products

Step-by-step explanation:

Activity based costing is a method that is used to share overhead and indirect costs among various products and services offered by a company.

So products that are produced in larger volume will receive more cost allocation.

The cost driver rate is used in this allocation and is calculated by dividing total pool cost by the cost driver.

So cost is allocated based on units of goods produced.

Examples of indirect cost shared are salaries and utilities.

Activity based costing is best for multiple diverse products. So that cost can effectively be allocated based on the amount of activity attributed to a particular product.