The correct answers are:
2 In a system of ABC, for costs that vary with production levels, the most suitable cost driver is likely to be direct labour hours or machine hours.
3 Activity based costs are not the same as relevant costs for the purpose of short-run decision making.
4 Activity based costing is a form of absorption costing.
Implementation of ABC is likely to be cost-effective when variable production costs are a low proportion of total production costs and overhead costs, traditionally assumed to be fixed costs, are a large proportion of total production costs.
At a unit level, the cost driver for production-related overheads is likely to be direct labour hours or machine hours.
It is a mistake to associate activity-based costs with the variable costs of an activity. Some of the costs may be variable in the short run, but others are not. So ABC costs should not be treated as relevant costs for the purpose of short-term decision making. It is more appropriate to think of ABC as a form of absorption costing, where overheads are allocated to activities and products on a more meaningful basis than with traditional absorption costing.
