Answer (B) is correct . Design of an activity-based costing system starts with process value analysis, a comprehensive understanding of how an organization generates its output. It involves a determination of which activities that use resources are value-adding or nonvalue-adding and how the latter may be reduced or eliminated. This linkage of product costing and continuous improvement of processes is activity-based management (ABM). It encompasses driver analysis, activity analysis, and performance measurement.
Answer (A) is incorrect because Activity-based costing tends to increase the number of cost pools and drivers used.
Answer (C) is incorrect because Activity-based costing’s philosophy is to accumulate homogeneous cost pools. Thus, the cost elements in a pool should be consumed by cost objects in proportion to the same driver. Homogenizing cost pools minimizes broad averaging of costs that have different drivers.
Answer (D) is incorrect because Activity-based costing’s philosophy is to accumulate homogeneous cost pools. Thus, the cost elements in a pool should be consumed by cost objects in proportion to the same driver. Homogenizing cost pools minimizes broad averaging of costs that have different drivers.
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