ABC Part B

Question 1

Characteristics of factory when traditional absorption systems developed

Answer 1

1. Direct costs were a high proportion of total costs
2. Relatively small number of support functions therefore low OHs
3. Low level of mechanisms
4. Very labour based production
5. Large runs of standardised product
6. Slow rate of change both of products and methods

Question 2

Characteristics of a typical factory now

Answer 2

1. Greater automation + computerisation
2. Manufacturing overheads are higher proportion of total costs
3. Growth in service support function
4. Support functions are unaffected by production volume. They vary in the long term- according to the range + complexity of products
5. consequently, absorbing overheads simply on production volume tends to over cost high volume products and under cost low volume products

Question 3

Cost driver

Answer 3

• activity or transaction, which is a significant determination of cost

Question 4

What benefits does ABC provide

Answer 4

• more accurate and more precise decisions
• increases understanding of OH + cost drivers
• effective challenge of operating costs to find better ways of allocating and eliminating OHs
• enables improved product and customer profitability analysis
• supports performance management techniques (continuous improvement + balanced scenarios)

Question 5

Traditional v ABC

1

Answer 5

• one overhead rate
• easier to implement
• only allocates product cost
• can be used for external cost
• can be used for external reports
• required 1 set of body
• less accurate

Question 6

Traditional v ABC

Answer 6

• multiple activity based costs (cost pools)
• difficult to implement
• may allocate period cost
• cannot be used for external reports
• required two more sets of bodies
• more accurate
• costs become easier to control

Question 7

Activity based costing

Answer 7

• shows the relationship between overhead and the activities that caused them. ABC focuses attention on what factors cause or drive costs