Activity-based costing (ABC) can eliminate cost distortions because ABC systems ________.
A) establish a cause-and-effect relationship with the activities performed
B) use single cost pool for all overhead costs, thereby enabling simplicity
C) use a broad average to allocate all overhead costs
D) never consider interactions between different departments in assigning support costs

Question

Quizplus · Accepted Answer

Activity-based costing (ABC) establishes a cause-and-effect relationship with the activities performed, which help eliminate cost distortions. ABC assigns overhead costs to specific activities, and then those costs are allocated to the products or services that demanded the activity. This approach makes the cost allocation more accurate and objective. The traditional costing method, on the other hand, uses a broad average to allocate overhead costs and can distort the actual profitability of products or services.

Activity-Based Costing (ABC) Can Eliminate Cost Distortions Because ABC Systems