Activity-based costing systems should be adopted when ________.
A) indirect costs represent a small proportion of a product's total costs
B) indirect costs represent a large proportion of a product's total costs
C) a company makes one simple product
D) a company has a simple manufacturing process

Question

Quizplus · Accepted Answer

Activity-based costing systems are most effective when indirect costs represent a large proportion of a product's total costs. This is because traditional costing systems may not accurately assign overhead costs to products, leading to inaccurate product costs and potentially poor business decisions. By using an activity-based costing system, a company can more accurately assign indirect costs by identifying the activities that drive those costs and linking them to the appropriate products or services. This approach is particularly useful in complex manufacturing and service environments with multiple products, processes, and indirect cost drivers.

Activity-Based Costing Systems Should Be Adopted When ________