alleryStart learning →Why is activity-based costing described as a more accurate way of allocating overhead?
AEach cost driver is paid its own fee
BEvery cost pool holds one item only
CEvery product uses one activity only
DEach cost driver has its own rate
Answer & Solution
Correct answer: D. Each cost driver has its own rate
1. Accuracy comes from refusing to use one rate for everything.
2. Each cost driver will have its own overhead rate.
3. That is why ABC is a more accurate method of allocating overhead.
4. A single blended rate would blur the differences between products.
_Source: OpenStax Principles of Accounting Volume 2, Managerial Accounting (CC BY-NC-SA 4.0), Ch 6 'Activity-Based, Variable, and Absorption Costing', sections 6.1-6.5_
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