How does activity-based costing eliminate cost distortions?
A)Recognises interactions between different departments in assigning support costs
B)Eliminates product variations
C)Establishes multiple cost pools
D)Develops cost drivers that have a cause-and-effect relationship with the activities performed

Question

Quizplus · Accepted Answer

Activity-based costing develops cost drivers that have a cause-and-effect relationship with the activities performed, which helps to eliminate cost distortions by accurately assigning costs to specific activities and products. This approach also recognises interactions between different departments in assigning support costs and establishes multiple cost pools, but these factors are not as significant in eliminating cost distortions as the use of appropriate cost drivers. Eliminating product variations is not a feature of activity-based costing.

How Does Activity-Based Costing Eliminate Cost Distortions