If a Firm Uses Activity-Based Costing to Allocate Costs, It

question 5

Multiple Choice

If a firm uses activity-based costing to allocate costs, it must:

• A) Combine costs in appropriate pools.
• B) Select appropriate cost drivers.
• C) Calculate an appropriate rate for each pool.
• D) Allocate costs based on predetermined rates for cost pools.
• E) Perform all of these steps.

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Definitions:

Contribution Margin

The amount by which a product's selling price exceeds its total variable costs, indicating the contribution towards covering fixed costs.

Operating Income

Earnings from a company's primary business activities, excluding costs and expenses, interest, and taxes.

Absorption Costing

An approach to accounting that integrates all costs associated with manufacturing - including direct materials, direct labor, and overhead costs, no matter if they are variable or fixed, into the final cost of a product.

Variable Costing

A bookkeeping technique that incorporates only variable production expenses, such as direct materials, direct labor, and variable manufacturing costs, into the cost of products, while omitting fixed overhead.