1a. Activity-based costing is appropriate when a project can be divided into defined activities so there is no overlap between them. Also, the amount of time and cost spent on preparing the cost drivers must not be so great that they exceed the benefits. It is also appropriate when the number of activities is uncertain or may change during the estimate process (Activity Based Costing, n.d.).
Traditional cost accounting is structure-oriented whereas ABC is process-oriented (Emblemsvag, 2006).
2a. Operating leverage is the highest in e-commerce companies. E-commerce companies have very low variable costs but high initial up-front development cost. For example, Amazon.com initially had a fixed up-front development cost of over $60 million but no per transaction cost (Economics of Electronics Commerce, n.d.). Operating leverage is the lowest in merchandizing companies. Such companies mainly engage in the buying and selling of goods. Their fixed costs include mainly storage and selling costs. A higher proportion of their costs is variable costs such as packaging of goods and transportation costs. In between, service companies have a higher proportion of fixed costs and hence higher operating leverage than manufacturing companies. Service companies, such as hair salons, incur a fixed amount of rent, staff salary, and facility and equipment cost regardless of whether there are any customers. Variable costs, such as shampoo, are a very low proportion. Manufacturing companies have a lower operating leverage than service companies and e-commerce companies but higher operating leverage than merchandizing companies. Their fixed costs include land, equipment, machinery, plants, and facilities. ...
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