Question

Which of the following activity measures correlates with (or moves in tandem with) the allocation bases used in traditional absorption costing systems?

Multiple Choice

• Batch-level activity measures

• Product-level activity measures

• Unit-level activity measures

• Customer-level activity measures

Answer 1

Answer:

Absorption Costing is allows businesses to allocate costs to products produced and thus calculate overheard for the production.

Traditional costing method requires classification of costs into Product Costs and Period Costs. Product costs are direct costs, direct labour and factory overhead. Period Costs include Selling and Administrative overheads.

Traditional Cost Accounting requires a total overhead costs and simple allocation rule. ABC analysis requires activities' costs too in addition. Thus, traditional absorption costing goes in line with 'production-volume based' costing.

Therefore, in the given options, Option A - Batch Level Measures holds good. This is for two reasons.

Reason 1: Traditional Absorption Costing Base correlates with the costs of 'volume production / large scale production' and 'Batch of Production'. It does not sees costs as each individual cost center.

Reason 2: Traditional Absorption Costing focuses on Product costs and Period Costs. It ignores Activity Costs. This fact clears that all modern methods of costing ignore traditional approach and follow ABC costing. ABC Costing evolution goes first with Batch Costing which focuses on Batch of Products. Batch related activities are performed each time when 'Production Batches' are produced. This is in line with Traditional Approach.

Above two reasons explain why other Multiple options given in question are wrong.

Following examples will give even more clear idea:

• Batch Level: Soaps, Stationery, Textiles production cost - batch wise
• Product Level: Each product is carefully observed and served through support. Example: Customised Product design, Products to be used in job-work
• Unit-Level: Airplane, Luxury Car manufacturing activity cost
• Customer Level: Technological support, Consultancy or other services.

Conclusion:  

Batch-level activity measures correlates with the allocation bases used in traditional absorption costing systems.

Correct Answer: Option A: Batch-level activity measures

Kindly comment for clarification or if more explanation is needed.

All the best !!