ACCA Performance Management (F5) Certification Practice Exam

What are the five basic steps of Activity-Based Costing (ABC) calculation?

1. Identify cost pool for each activity

2. Identify the organization's major activity

3. Calculate the total sales revenue

4. Allocate fixed costs based on units produced

The correct answer is: Identify the organization's major activity

The correct understanding of the five basic steps of Activity-Based Costing (ABC) highlights the importance of identifying the organization's major activities as a foundational step. This is crucial because ABC centers around analyzing costs and assigning them accurately based on specific activities that drive them, rather than merely focusing on products or services alone. In the ABC system, once the key activities are identified, the subsequent steps involve determining the costs associated with these activities, which includes creating cost pools for each activity, selecting cost drivers appropriately, assigning costs to products or services based on their usage of these activities, and finally calculating the total product costs. By beginning with a clear identification of major activities, an organization can effectively map out where resources are consumed and how costs can be better controlled, leading to more accurate pricing and profitability analysis. The other options, while they may relate to financial or operational practices, do not capture the fundamental sequence needed to implement the ABC methodology effectively. For instance, calculating total sales revenue or allocating fixed costs based on units produced does not directly pertain to the core principles of Activity-Based Costing, which focuses instead on understanding the activities that incur costs and ensuring accurate cost attribution for performance measurement and decision-making purposes.