9706 · 4.1.1
Activity Based Costing — FAQ
Frequently asked questions for 9706 Activity Based Costing. Direct answers first, then deeper explanation — then practise with marking.
Is Activity Based Costing always more accurate than traditional costing?
Generally, yes, because it uses multiple factors to allocate overheads that are more closely linked to what causes those costs. However, its accuracy depends on correctly identifying activities and their cost drivers. If these are chosen poorly, the results can still be misleading. For very simple businesses with low overheads, traditional costing might be 'accurate enough' and more cost-effective.
When is a business most likely to benefit from using ABC?
A business is most likely to benefit from ABC when it has high levels of overhead costs, produces a diverse range of products (some high-volume, some low-volume), and has complex production processes. In these situations, traditional costing is likely to distort product costs significantly, and the more accurate information from ABC can lead to much better strategic decisions.
Can ABC be used in service industries?
Absolutely. Service industries also have overheads and activities. For example, a bank can use ABC to determine the cost of different services like processing a loan application, opening an account, or providing financial advice. The activities might be 'customer interviews' or 'credit checks', and the cost drivers could be 'number of applications' or 'hours of advice given'.