Activity-Based Costing (ABC) – 50 MCQs
1. Activity-Based Costing assigns overhead costs based on:
A. Direct labor hours
B. Machine hours
C. Cost drivers related to activities
D. Units produced
Answer: C
2. Which of the following best describes a cost driver?
A. A fixed overhead cost
B. A factor that causes a change in activity cost
C. A department cost
D. A product cost
Answer: B
3. ABC is most useful when:
A. Overheads are insignificant
B. Products are homogeneous
C. Overhead costs are high and products are diverse
D. Only direct costs are relevant
Answer: C
4. Which is a unit-level activity?
A. Machine setup
B. Quality inspection
C. Processing each unit
D. Product design
Answer: C
5. Which is a batch-level activity?
A. Machine operation
B. Setup of machines
C. Factory supervision
D. Product advertising
Answer: B
6. Which activity is product-level?
A. Customer order processing
B. Product design
C. Machine operation
D. Material handling
Answer: B
7. Facility-level activities include:
A. Setup costs
B. Quality inspection
C. Factory rent
D. Material movement
Answer: C
8. In ABC, overheads are first allocated to:
A. Products
B. Departments
C. Cost pools
D. Cost centers
Answer: C
9. Which is a correct cost driver for machine setups?
A. Units produced
B. Machine hours
C. Number of setups
D. Direct labor hours
Answer: C
10. Traditional costing differs from ABC because traditional costing:
A. Uses multiple cost drivers
B. Uses activity cost pools
C. Uses volume-based allocation
D. Is more accurate
Answer: C
11. Which industry benefits MOST from ABC?
A. Single-product manufacturing
B. Highly automated manufacturing
C. Service industry with diverse services
D. Pure trading business
Answer: C
12. Which of the following is NOT a benefit of ABC?
A. Improved cost accuracy
B. Better pricing decisions
C. Reduced accounting effort
D. Identification of non-value activities
Answer: C
13. ABC helps management to:
A. Reduce direct material cost
B. Identify cost reduction opportunities
C. Eliminate fixed costs
D. Increase depreciation
Answer: B
14. Which cost is usually excluded from ABC product costing?
A. Machine depreciation
B. Direct labor
C. Factory rent
D. Product-specific setup costs
Answer: C
15. A cost pool is:
A. A group of products
B. A collection of similar activities
C. A department
D. A cost driver
Answer: B
16. Which of the following is a non-value-added activity?
A. Assembly
B. Rework due to defects
C. Product design
D. Packaging
Answer: B
17. ABC supports which type of decision?
A. Make or buy
B. Product mix
C. Pricing
D. All of the above
Answer: D
18. Which costing method is more suitable when overheads are low?
A. ABC
B. Marginal costing
C. Traditional costing
D. Target costing
Answer: C
19. In ABC, costs are traced from activities to products using:
A. Cost pools
B. Cost drivers
C. Departments
D. Labor hours
Answer: B
20. Which of the following is a transaction driver?
A. Machine hours
B. Number of purchase orders
C. Time spent
D. Direct labor cost
Answer: B
21. Which is a duration cost driver?
A. Number of inspections
B. Inspection hours
C. Units produced
D. Orders received
Answer: B
22. ABC is LEAST suitable when:
A. Many products exist
B. Overhead costs are significant
C. Products consume resources uniformly
D. Activities differ significantly
Answer: C
23. Which statement is TRUE?
A. ABC increases cost distortion
B. ABC ignores overheads
C. ABC reduces cross-subsidization
D. ABC is simpler than traditional costing
Answer: C
24. Cross-subsidization means:
A. Profitable products subsidize loss-making ones
B. Costs are equally distributed
C. Fixed costs are eliminated
D. Costs are ignored
Answer: A
25. ABC was developed mainly to address problems of:
A. Marginal costing
B. Absorption costing
C. Traditional overhead allocation
D. Budgeting
Answer: C
26. Which cost driver is suitable for material handling?
A. Number of units
B. Number of material moves
C. Machine hours
D. Labor cost
Answer: B
27. Which is a limitation of ABC?
A. More accurate costing
B. High implementation cost
C. Better performance measurement
D. Improved decision-making
Answer: B
28. ABC treats most overhead costs as:
A. Fixed
B. Variable with respect to activities
C. Period costs
D. Sunk costs
Answer: B
29. ABC can be applied in:
A. Manufacturing only
B. Service sector only
C. Non-profit organizations only
D. Both manufacturing and service sectors
Answer: D
30. Which activity adds NO value to customers?
A. Inspection
B. Assembly
C. Packaging
D. Design
Answer: A
31. ABC improves cost accuracy by:
A. Using fewer cost drivers
B. Using a single overhead rate
C. Using multiple relevant cost drivers
D. Ignoring indirect costs
Answer: C
32. Which of the following is a resource cost driver?
A. Machine hours
B. Number of orders
C. Time spent by employees
D. Units produced
Answer: C
33. In ABC, activities consume:
A. Products
B. Resources
C. Customers
D. Departments
Answer: B
34. Products in ABC consume:
A. Resources directly
B. Activities
C. Departments
D. Labor hours only
Answer: B
35. Which costing system is preferred for complex operations?
A. Marginal costing
B. Standard costing
C. ABC
D. Process costing
Answer: C
36. ABC is especially helpful for identifying:
A. Fixed costs
B. Variable costs
C. High-cost activities
D. Direct costs
Answer: C
37. Which of the following is NOT an activity hierarchy level?
A. Unit-level
B. Batch-level
C. Customer-level
D. Facility-level
Answer: C
38. ABC focuses on:
A. Departments
B. Activities
C. Profit centers
D. Cost centers
Answer: B
39. Which costing method may overcost high-volume products?
A. ABC
B. Marginal costing
C. Traditional absorption costing
D. Variable costing
Answer: C
40. ABC helps in eliminating:
A. Direct labor
B. Wasteful activities
C. Fixed costs
D. Product costs
Answer: B
41. Which statement about ABC is correct?
A. It is mandatory under GAAP
B. It is mainly for internal management
C. It replaces financial accounting
D. It ignores overheads
Answer: B
42. Which is a value-added activity?
A. Rework
B. Inspection
C. Assembly
D. Storage
Answer: C
43. ABC can improve profitability by:
A. Increasing production
B. Better pricing and cost control
C. Increasing fixed costs
D. Ignoring overheads
Answer: B
44. The first step in ABC implementation is:
A. Assign costs to products
B. Identify activities
C. Select cost drivers
D. Compute overhead rates
Answer: B
45. Which costing system emphasizes cause-and-effect relationships?
A. Traditional costing
B. Marginal costing
C. ABC
D. Standard costing
Answer: C
46. ABC is less effective when:
A. Overhead is high
B. Products are customized
C. Production is simple and repetitive
D. Costs are activity-driven
Answer: C
47. Which of the following is an example of service-industry ABC?
A. Machine setup
B. Patient admission process
C. Assembly line operation
D. Material movement
Answer: B
48. ABC supports strategic decisions like:
A. Market entry
B. Product discontinuation
C. Process improvement
D. All of the above
Answer: D
49. Compared to traditional costing, ABC provides:
A. Less information
B. More accurate product costs
C. Lower data requirement
D. Less complexity
Answer: B
50. ABC is primarily designed to improve:
A. Financial reporting
B. Tax compliance
C. Internal cost management
D. External audit
Answer: C
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Numerical MCQs – Activity-Based Costing (ABC)
1. Setup Cost Allocation
A company has total setup cost of ₹240,000. Total setups = 120.
Product A requires 30 setups.
What setup cost is allocated to Product A?
A. ₹48,000
B. ₹60,000
C. ₹72,000
D. ₹80,000
Answer: B
Working: 240,000 ÷ 120 = 2,000 per setup × 30 = ₹60,000
2. Machine Cost Allocation
Machine-related overhead = ₹300,000
Total machine hours = 15,000
Product X uses 2,000 machine hours.
Allocated overhead?
A. ₹30,000
B. ₹35,000
C. ₹40,000
D. ₹50,000
Answer: C
Working: 300,000 ÷ 15,000 = 20 per MH × 2,000 = ₹40,000
3. Order Processing Cost
Total order processing cost = ₹180,000
Total orders = 900
Product B placed 120 orders.
Allocated cost?
A. ₹18,000
B. ₹21,600
C. ₹24,000
D. ₹30,000
Answer: C
Working: 180,000 ÷ 900 = 200 per order × 120 = ₹24,000
4. Inspection Cost (Duration Driver)
Inspection cost = ₹90,000
Total inspection hours = 3,000
Product C uses 450 inspection hours.
Allocated cost?
A. ₹12,000
B. ₹13,500
C. ₹15,000
D. ₹18,000
Answer: B
Working: 90,000 ÷ 3,000 = 30 per hour × 450 = ₹13,500
5. Material Handling Cost
Material handling cost = ₹150,000
Total material moves = 600
Product D requires 90 moves.
Allocated cost?
A. ₹18,000
B. ₹20,000
C. ₹22,500
D. ₹25,000
Answer: C
Working: 150,000 ÷ 600 = 250 per move × 90 = ₹22,500
6. Total ABC Overhead
Product E incurs:
- Setup cost: ₹40,000
- Machine cost: ₹60,000
- Inspection cost: ₹20,000
Total ABC overhead?
A. ₹100,000
B. ₹110,000
C. ₹120,000
D. ₹130,000
Answer: C
7. Cost per Unit under ABC
Total ABC overhead for Product F = ₹180,000
Units produced = 6,000
Overhead per unit?
A. ₹25
B. ₹28
C. ₹30
D. ₹35
Answer: C
Working: 180,000 ÷ 6,000 = ₹30
8. Activity Rate Calculation
Total quality inspection cost = ₹96,000
Total inspections = 800
Inspection cost per inspection?
A. ₹100
B. ₹110
C. ₹120
D. ₹150
Answer: C
9. Batch-Level Cost
Setup cost = ₹200,000
Number of batches = 100
Product G produced in 25 batches.
Allocated cost?
A. ₹40,000
B. ₹45,000
C. ₹50,000
D. ₹55,000
Answer: C
10. ABC vs Traditional Costing
Traditional overhead per unit = ₹80
ABC overhead per unit = ₹65
Units produced = 4,000
Overcosting under traditional costing?
A. ₹40,000
B. ₹50,000
C. ₹60,000
D. ₹65,000
Answer: C
Working: (80 − 65) × 4,000 = ₹60,000
11. Customer Order Cost
Customer support cost = ₹120,000
Total customer calls = 2,000
Product H related calls = 300
Allocated cost?
A. ₹15,000
B. ₹18,000
C. ₹20,000
D. ₹22,000
Answer: B
12. Multiple Activity Allocation
Product J uses:
- 40 setups @ ₹2,000
- 1,500 machine hours @ ₹25
- 200 inspections @ ₹100
Total ABC overhead?
A. ₹125,000
B. ₹135,000
C. ₹145,000
D. ₹155,000
Answer: C
Working:
Setups: 80,000
Machine: 37,500
Inspection: 20,000
Total = ₹145,500 (≈ ₹145,000)
13. Low Volume Product
ABC overhead = ₹90,000
Units produced = 1,000
Overhead per unit?
A. ₹60
B. ₹70
C. ₹80
D. ₹90
Answer: D
14. Cost Driver Rate
Purchase ordering cost = ₹150,000
Total purchase orders = 750
Cost per purchase order?
A. ₹150
B. ₹175
C. ₹200
D. ₹225
Answer: C
15. Product Discontinuation Decision
Product K selling price/unit = ₹400
ABC cost/unit = ₹360
Contribution per unit?
A. ₹20
B. ₹30
C. ₹40
D. ₹50
Answer: C
16. Inspection Avoidance Savings
Inspection hours reduced by 500
Cost per inspection hour = ₹40
Cost savings?
A. ₹15,000
B. ₹18,000
C. ₹20,000
D. ₹22,000
Answer: C
17. Total Cost per Unit
Direct material = ₹120
Direct labor = ₹80
ABC overhead per unit = ₹100
Total cost per unit?
A. ₹280
B. ₹290
C. ₹300
D. ₹320
Answer: C
18. Cross-Subsidization Effect
Traditional overhead/unit = ₹90
ABC overhead/unit = ₹70
Units = 3,000
Amount of cost distortion?
A. ₹40,000
B. ₹50,000
C. ₹60,000
D. ₹70,000
Answer: C
19. Service Industry ABC
Patient admission cost = ₹200,000
Total patients = 4,000
Patients in Cardiology = 600
Allocated cost?
A. ₹25,000
B. ₹30,000
C. ₹35,000
D. ₹40,000
Answer: D
20. Profit under ABC
Sales revenue = ₹900,000
Total ABC cost = ₹720,000
Profit?
A. ₹150,000
B. ₹160,000
C. ₹170,000
D. ₹180,000
Answer: D
Exam Tips (CMA & ACCA)
✔ Always calculate activity rate first
✔ Identify correct cost driver
✔ ABC often shows lower cost for high-volume products
✔ Numerical questions are easy marks if steps are followed
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