Business Degree Certification Practice Test

Which terms would make the following sentence true? Manufacturing companies that benefit the most from activity-based costing are those where overhead costs are a _________ percentage of total product cost and where there is ___________ diversity among the various products that they produce.

1. low, little

2. low, considerable

3. high, little

4. high, considerable

The correct answer is: high, considerable

Manufacturing companies that benefit the most from activity-based costing typically experience high overhead costs as a percentage of total product cost and considerable diversity among their products. When overhead costs are high relative to direct costs, activity-based costing allows companies to allocate these overhead costs more accurately based on the activities that drive costs. This precision is essential in environments where overhead is significant, as it helps identify the true cost of producing each product more effectively. Furthermore, in scenarios where there is considerable diversity among the products being manufactured, activity-based costing can highlight the different resource requirements for each product line. This diversity means that products may consume resources in varying amounts, further demonstrating the need for a more detailed costing approach like activity-based costing to ensure that each product is priced accurately according to its consumption of costs. In summary, the correct answer illustrates the contexts in which companies can maximize the utility of activity-based costing by having substantial overhead costs and a wide range of products, facilitating better cost management and pricing strategies.