Why Would a Firm Use Activity-Based Costing (ABC) Rather Than

question 56

Essay

Why would a firm use activity-based costing (ABC) rather than traditional two-stage methods of cost allocation for overhead?

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Definitions:

Trade Credit

The arrangement between businesses to buy goods or services on account, paying the supplier at a later date.

Effective Annual Cost

Effective Annual Cost denotes the total cost of financing on a yearly basis, incorporating fees and interest rates to reflect the true annual cost of borrowing.

Sole Supplier

A single source from which a company purchases goods or services, often leading to increased negotiation power for the supplier but potential risks for the buyer.

Cash Conversion Cycle

A metric that measures the time span between a company's outlay of capital for supplies and receiving payment from the sale of those goods or services.