When Managers Use ABC Cost Allocation Rates for Decision Making

question 124

Multiple Choice

When managers use ABC cost allocation rates for decision making without distinguishing between flexible and committed costs, their estimates of incremental costs are biased upward or downward. If activity levels are steadily increasing over time, this bias would provide:

• A) Information that overstates costs
• B) Information that understates costs
• C) Accurate information
• D) Reliable information

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Definitions:

Rate

A specified measure or quantity considered in relation to another quantity or measure, often used in financial contexts to describe interest or growth rates.

Proportion

A part, share, or number considered in comparative relation to a whole.

Vertical Analysis

A financial analysis method that expresses each item in a financial statement as a percentage of a base figure, facilitating comparison across companies or periods.

Net Income

Net income is the total earnings of a company after all expenses and taxes have been subtracted from total revenue, indicating the company's profitability.