Cofission Electronics make small electronic parts. The management accountant at Cofission, Jasmine Vake, decides to implement an activity-based costing (ABC) system. She lists the following points to support her decision:
i. The recent cost report shows that the ratio of prime costs to manufacturing overhead cost is approximately 1:3.
ii. Cofission is a small company.
iii. Cofission has three product lines: basic parts (parts that are common to many products and many suppliers), customised parts (electronic parts that are highly customised to very specialised electric motors), prototypes (where Cofission Electronics need to design as well as manufacture these specialised electronic parts).
iv. Cofission Electronics has recently implemented a flexible manufacturing system; this practically eliminates any setup costs; with this system, product customisation takes very little additional time.
You are not convinced that all of the above points support Jasmine's decision. Which of the above points support the use of ABC in Cofission?

Question

Quizplus · Accepted Answer

Activity-based costing (ABC) is most beneficial in environments where products consume resources differently, which is evident in point (i), where the high overhead cost suggests complexity in allocating costs, and in point (iii), where the diversity in product lines (basic parts, customized parts, and prototypes) indicates varying activities and resource consumption patterns. Point (ii), the company's size, and point (iv), the implementation of a flexible manufacturing system that reduces setup costs, do not inherently support the need for ABC.

Cofission Electronics Make Small Electronic Parts