Below is a US CMA–exam-oriented scenario (essay-type)
Scenario-Based Essay Question
(Activity-Based Costing – US CMA Exam Pattern)
Question:
Omega Manufacturing Inc. produces two products: Product Alpha (high volume, standardized) and Product Beta (low volume, customized). The company currently uses a traditional absorption costing system based on direct labor hours to allocate overhead.
Management has noticed that Product Beta appears highly profitable, while Product Alpha shows low margins, despite Alpha having stronger market demand and Beta facing pricing pressure. The CFO suspects that the overhead allocation method is distorting product costs and decides to evaluate Activity-Based Costing (ABC).
Omega identifies the following major activities and cost drivers:
| Activity | Cost Driver |
|---|---|
| Machine setup | Number of setups |
| Quality inspection | Number of inspections |
| Material handling | Number of material moves |
| Machining | Machine hours |
Product Beta consumes a significantly higher proportion of setups, inspections, and material moves relative to its production volume.
Required:
- Explain why traditional costing may distort product costs in this scenario.
- Explain how Activity-Based Costing improves cost accuracy.
- Discuss managerial decisions that could improve after adopting ABC.
- Briefly state limitations of Activity-Based Costing.
- What is cost subsidization
- Write 1 difference between Traditional costing and Activity base costing
- Write two examples of methods of costing in Traditional costing system
- Write difference between under costing and over costing, Also mention Product Alpha and Product Beta,which one is overcost and undercoat?
- Write 3 examples of Cost activity with suitable Cost Driver
- Write 1 reason, Why Activity base costing is not suitable for one product, small business concern
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