ACCA Performance Management (F5) Certification Practice Exam

In Activity-Based Costing, what is crucial for identifying each activity?

1. Implementing a firm-wide inventory system

2. Defining and recognizing cost drivers

3. Increasing production speed

4. Engaging in market analysis

The correct answer is: Defining and recognizing cost drivers

Identifying each activity in Activity-Based Costing (ABC) hinges on defining and recognizing cost drivers. Cost drivers are the factors that cause a change in the cost of an activity, making them pivotal in understanding the relationship between activities and the resources they consume. By accurately identifying these drivers, an organization can assign costs more precisely to products and services based on the actual activities involved. This leads to a more accurate assessment of profitability and helps in decision-making regarding pricing, budgeting, and strategic planning. Defining cost drivers allows businesses to pinpoint which activities are generating costs and in what proportion. This is essential for implementing a comprehensive ABC system, which ultimately aims to improve efficiency and reduce waste by focusing on the true costs associated with each activity. Recognizing these cost drivers enables organizations to better manage their operations and optimize resource allocation, contributing to better overall performance. Other choices, while they have their relevance in a business context, do not specifically pertain to the goal of identifying activities within the framework of Activity-Based Costing. For instance, implementing a firm-wide inventory system, increasing production speed, and engaging in market analysis may enhance operational efficiency or provide insights into external market conditions, but they do not directly address the identification of activities that ABC aims to achieve through the