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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Which of the following is a true statement about activity-based customer costing?

  1. a. Customer diversity requires multiple drivers to trace costs accurately to customers.
  2. b. Customers consume customer-driven activities in the same proportions.
  3. c. It seldom produces changes in the company’s customer mix.
  4. d. It never improves profitability.
  5. e. None of these.

To determine

Identify a statement that correctly determines the activity-based customer costing.

Explanation

ABC Costing:

In activity based costing, overhead costs are allocated to various departments based on the respective cost driver. ABC costing provides a more accurate allocation than using a threshold rate. For example, using labor hours for allocating ordering costs would not be appropriate, rather number of orders should be used to allocate the cost.

a.

In activity based customer costing, costs relating to customers are classified into activities. Thereafter, these activity costs are allocated to customer orders on the basis of activity drivers.

Due to diversity in customers like volume diversity, and location diversity, multiple drivers are required to trace costs. This customer diversity may require additional activities to be performed for certain types of customers like customization cost. This results in application of multiple drivers for each order to charge accurately. Therefore, this is the correct option.

b.

Customers may require different proportion of customer-driven activities...

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