In Both Activity-Based and Time-Driven Activity-Based Systems We Calculate Cost-Driver

question 131

Essay

In both activity-based and time-driven activity-based systems we calculate cost-driver rates for support activities (e.g., the cost to ship an item or the cost to process a customer order) and it is asserted that these rates are best determined by dividing budgeted resource costs (for a given cost pool) by the practical capacity of resources supplied.
Required:
1.What is the primary advantage of using practical capacity as the volume level for determining cost allocation rates in an ABC or TDABC system?
2.What is the appropriate accounting treatment for unused capacity costs for a given accounting period?

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Definitions:

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Priming

A psychological phenomenon where exposure to one stimulus influences the response to a subsequent stimulus, without conscious guidance or intention.

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The representativeness heuristic is a cognitive bias where individuals judge the probability or frequency of a hypothesis by considering how much the hypothesis resembles available data.