ACCA Performance Management (F5) Certification Practice Exam

Which of the following is NOT an advantage of Activity-Based Costing?

1. Provides insight into what drives overhead costs

2. Can apply to all overhead costs, not just production costs

3. Eliminates all overhead costs

4. Provides more accurate costs per unit

The correct answer is: Eliminates all overhead costs

Activity-Based Costing (ABC) is a method that provides a more nuanced understanding of overhead costs by assigning them to specific activities and cost drivers. The correct choice identifies an assertion that is not true regarding the advantages of ABC. Specifically, ABC does not eliminate overhead costs; rather, it allows companies to analyze and understand the breakdown of those costs in a detailed manner. By recognizing the different activities that contribute to overhead expenses, ABC helps managers see where these costs arise and how they might be managed or reduced. However, it does not imply the removal of such costs altogether. In contrast, the other options highlight legitimate advantages of Activity-Based Costing. For example, ABC indeed provides insight into what drives overhead costs, which is crucial for effective cost management and decision-making. It is applicable to a wide range of overhead costs beyond just production, allowing for a more comprehensive view of the entire operation. Additionally, ABC typically leads to more accurate unit cost calculations by assigning costs based on actual activities and resources consumed, contributing to better pricing and profitability strategies. Overall, the function of ABC is not to eliminate costs but to provide detailed insights that can lead to better management of those costs.