ACG 2071 Chapter 4 Review Questions with
Verified Correct Answers
What is Activity Based Costing (ABC)?
A costing method that identifies activities in an organization and assigns the cost of each
activity to all products and services according to the actual consumption.
What is a predetermined overhead rate?
It is computed by estimating total expected indirect costs and dividing by one estimated cost
driver or allocation base.
What is a cost driver?
Any activity that increases or drives up the costs of that activity.
What are departmental overhead rates?
Rates that allocate overhead to each department rather than using one predetermined
overhead rate.
What is activity cost allocation?
Analyzing the activities that drive indirect costs and developing separate cost allocation bases
for each of those activities.
What signs indicate incorrect indirect cost allocations?
Different jobs or products using different amounts of resources, nonsensical profits/losses,
and loss of bids or market share.
What is the first step in creating an ABC system?
Identify and classify activities using a cost hierarchy.
Verified Correct Answers
What is Activity Based Costing (ABC)?
A costing method that identifies activities in an organization and assigns the cost of each
activity to all products and services according to the actual consumption.
What is a predetermined overhead rate?
It is computed by estimating total expected indirect costs and dividing by one estimated cost
driver or allocation base.
What is a cost driver?
Any activity that increases or drives up the costs of that activity.
What are departmental overhead rates?
Rates that allocate overhead to each department rather than using one predetermined
overhead rate.
What is activity cost allocation?
Analyzing the activities that drive indirect costs and developing separate cost allocation bases
for each of those activities.
What signs indicate incorrect indirect cost allocations?
Different jobs or products using different amounts of resources, nonsensical profits/losses,
and loss of bids or market share.
What is the first step in creating an ABC system?
Identify and classify activities using a cost hierarchy.
