Section A

Question 1

Explain the Two-Stage Allocation Process under traditional costing method or
Activity Based Costing

Answer 1

Both use two stage allocation process, in stage one traditional allocates to departments whereas ABC allocates to activities, in stage 2 ABC use many second stage cost drivers, traditional relies on a small number of volume-based cost drivers where overheads are allocated to at a predetermined rate

Question 2

Discuss the main similarities and differences between traditional and ABC
systems.

Answer 2

Similarities – both allocate overheads to products, both involve a two-stage allocation process, both aim to determine product cost accurately

Differences – ABC uses many second stage cost drivers which are cause and effect whereas traditional uses a small number of volume-based cost drivers and relies on arbitrary allocation bases. ABC separates cost driver rates for support departments, traditional merges support and production

Question 3

Discuss the four main steps in designing the ABC system

Answer 3

Step 1 – deciding the activities within the overhead

Step 2 – assigning costs to activity cost pools

Step 3 – selecting appropriate cost drivers

Step 4 – Assigning activities to cost drivers

Question 4

Discuss the four main levels of activities in the ABC

Answer 4

Unit level

Budget level

Product/Customer sustaining

Business/Facility sustaining

Question 5

Distinguish between Job costing and process costing.

Answer 5

Process costing assumes each unit is identical so takes average cost of all units and applies it to all

Assigns each unit a cost as it assumes that each unit produced consumes a different level of resources

Question 6

Explain how normal and abnormal loss are treated differently in process
costing.

Answer 6

Normal losses – expected and unavoidable, cost absorbed in the remaining good units

Abnormal losses – unexpected and avoidable, not included in product cost but treated as a separate loss in the income statement

Question 7

Describe the cost-volume-profit analysis. Discuss how this analysis can be useful.

Answer 7

CVP analysis studies how changes in costs, sales and volume and price affect profit. It is used to determine the break-even point and guide decisions such as pricing, cost control and product mix. It is useful as it can determine break-even sales volume, assess the impact of pricing decision. Helps evaluate profitability of new products.

Question 8

Discuss the underlying assumptions of break-even analysis and give examples of
circumstances where these assumptions are violated and the nature of that violation.

Answer 8

The assumptions are that selling price remains constant, costs are linear, sales mix is constant, all produce units are sold. Violations and example: volume discounts – selling price not constant; economics of scale – variable costs decrease at higher volumes; inventory buildup – not all units are sold; multiple products – sales mix may vary

Question 9

Explain the benefits and limitations of standard costing practices in a company.

Answer 9

Benefits – budgeting and planning accuracy, variance analysis for control, performance evaluation, cost efficiency identification

Limitations – not suitable for custom jobs, can become outdated quickly, may demotivate staff if unrealistic

Question 10

Explain the difference between standard variable costing and standard absorption
costing

Answer 10

Standard variable costing – includes direct materials, labour and variable overhead. It values inventory lower and profit is only affected by sales

Standard absorption costing – includes all production costs, higher inventory evaluation and profit is affected by production volume