Question

In which of the following scenarios does Duration-Based Costing match Activity-Based Costing?

a.When there is no correlation between the consumption ratio and total activity time

b.When the consumption ratio decreases with a decrease in total activity time

c.When there is a direct correlation between activity cost and consumption ratio

d.When the consumption ratio increases with an increase in total activity time

Answer 1

Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods.

In contrast to the complexity of ABC, Duration-Based Costing is a simpler costing model that, drives cost based on time. Unlike ABC, a practitioner does not have to gather data concerning all activities. DBC uses the production cycle time, which is an observed value, to assign resource (overhead) costs to the product lines.

Hence by performing an analysis of the definitions mentioned above for ABC & DBC, we can conclude that the answer for the given question is "C", i.e. When there is a direct correlation between activity cost and consumption ratio, DBC will match ABC.