In question 5, how can the second choice can be an advantage of ABC? Do ABC costing reduce the total overhead cost? I think it only allocates OH costs in more sensible ways than the traditional absorbtion costing.

Using ABC forces the company to find out what is causing each of the overheads, and can therefore look for ways of operating more efficiently and therefore reduce overheads.

I do explain this (with an example) in my free lectures on ABC.

(But make sure that you do buy a Revision Kit from one of the ACCA approved publishers – you need to practice as many questions as possible, and the Revision Kits contain lots of exam-standard questions.)

I don’t know which of the questions you are referring to. I assume that you watched my free lectures on the absorption of overheads before attempting the test?

Why is that in question 3 when we are suppose to say 230400/ (96000+19200)=2 then 2*19200=38400 coz we dealing Q but in the answer you have done the opposite…details for product P where used on the other overheads item….

With regards question 2 why is it that traditional absorption costing systems tend to over cost high volume products and under cost low volume products? I know the opposite applies to ABC because overhead costs are now are larger proportion of overall or total cost in modern manufacturing and as a result the proportion of indirect costs is much higher than direct costs.

In regards to question 3 I understand how the answer came about but I was wondering how did you get the 115,200 in regards to working out other overheads

Suppose we make 100 units of A and 1,000 units of B.

Using absorption costing (it is on a per unit bases) would absorb the same amount per unit. Therefore in total B would be given 10 times as much overheads as A.

However, it could be that the overheads all related to setting up the machines for production and that they only need to set up the machines once for each product (regardless of how many they produce). Therefore using ABC an equal amount of overheads (in total) should be given to each product.

As a result using absorption costing is giving much lower overheads in total than if we used ABC.

(Again, this is only a very simple example to try and illustrate the point, and it will not necessarily always be the case, but for that sort of reason absorption will tend to end up giving lower overheads to low volume products than ABC.)

I didn’t get the general overheads part . I calculated the overhead absorption rate by the formulae TOTAL BUDGETED OH COST DIVIDE IT BY TOTAL BUDGETED LAB/MACHINE HOURS . 230400/115200 . I didn’t get the rest of the part . how and y did u multiply it with 96000 :/

It would help if you said the number of the question you are referring to!!

The absorption rate for ‘other overheads’ is 230,400/115,200, based on labour hours because the question said to use labour hours. (Machine hours are nothing to do with it).

The total labour hours used for product Q are 96,000 and therefore the total overhead for product Q is 96,000 x 230,400/115,200.

I do suggest that you watch the free lecture on absorption costing before attempting the test.

The questions says that the budgeted production units for Product Q is 9600; it then says that the Labour hours per unit for Product Q are 10. Therefore in order to make the budgeted 9600 units you would need to multiply (9600 x 10) = 96000. This gives the total labour hours that would be required to meet the budgeted production. Therefore when you are calculating the “Cost Per Other Overheads” you would then take (96000x$2.00 per unit) = $192,000

This is what I understood from working it out based on the example I had previously done in the lecture. Hope this helps.

The fact that for some overheads it might be impossible to identify a cost driver (and therefore be unable to apply ABC to those overheads) is not going to be an advantage of using ABC.

Forcing us to understand what drives an overheads is an advantage (because we can then try and use it more efficiently); the fact it deals with all overheads is an advantage; the fact that is can lead to a reduction in overheads is an advantage (because of using whatever is causing the overheads more efficiently)

In my so far understanding, total overhead doesn’t change, just allocation amount will change in accordance with the identified cost driver? And now we just find different ways to distribute incurred cost to activities more reasonably.

The main benefit of using ABC is that identifying what causes overheads can lead to using resources more efficiently and therefore lead to a reduction in the total overheads in the future.
I do suggest that you watch our free lecture on ABC where this is explained.

A company manufactures two products, P and Q for this the following information is available:-

Budgeted production: P (2,400 units) Q (9,600 units)
Labour hours per unit: P (8) Q (10)
# of production runs required: P (13) Q (15)
# of inspections during production;: P (5) Q (3)

Total production set-up costs $336,000
Total inspection costs $192,000
Total overhead costs $230,400

Other overhead costs are absorbed on the basis of labour hours.

I have done the following

Production set up $336K/28 ie the # of production runs then I multiply by 15 = 180K
Inspections $192K/8 ie total # of inspections the multiply by 3 = 72K
General overhead $230,400K/18 Labour hours by *10 = 96K

A company manufactures two products, P and Q for this the following information is available:-

Budgeted production: P (2,400 units) Q (9,600 units)
Labour hours per unit: P (8) Q (10)
# of production runs required: P (13) Q (15)
# of inspections during production;: P (5) Q (3)

Total production set-up costs $336,000
Total inspection costs $192,000
Total overhead costs $230,400

Other overhead costs are absorbed on the basis of labour hours.

I have done the following

Production set up $336K/28 ie the # of production runs then I multiply by 15 = 180K
Inspections $192K/8 ie total # of inspections the multiply by 3 = 72K
General overhead $230,400K/18 Labour hours by *10 = 96K

A company manufactures two products, P and Q for this the following information is available:-

Budgeted production: P (2,400 units) Q (9,600 units)
Labour hours per unit: P (8) Q (10)
# of production runs required: P (13) Q (15)
# of inspections during production;: P (5) Q (3)

Total production set-up costs $336,000
Total inspection costs $192,000
Total overhead costs $230,400

Other overhead costs are absorbed on the basis of labour hours.

The way I calculate it is: i multiply the budgeted production units of the 2 productsnd total them up together becoming 115,200 with its respective labour hours per unit and total them up together becoming 115,200. then divided it with the total overhead costs and got $2. I do not know where have I gone wrong.

That bit of the answer is correct.
However, two problems:
One is that set-up costs and inspection costs are also overheads.
Second is that the question wants to know the overhead cost per unit of Product Q.

and Sir, traditional costing tends to OVER or UNDER allocate costs to low-volume product? Coz here, the correct answer mentioned are both statements true but the answer at the back of your F5 lecture course notes is written as only statement 2 is true. Which is which?

Here is a very simple illustration.
Suppose a business produces 100 units of product A and 1000 units of product B.
The total overheads are $1,100.
Tradition costing will absorb the overheads at $1 per unit. So a total of $100 for product A and a total of $1,000 for product B.

Suppose now that the overheads of $1100 are set-up costs, and each product needs 1 set-up regardless of how many are produced (so 2 set-ups in total).
Since the cost per set-up is $550, the total overheads should (under ABC) be $550 for A and $550 for B.

The problem does not always exist, but traditional absorption does tend to under allocate costs to low volume products as I have illustrated above.

P Hours 19200 and Q 96000
Runs 13 @ 185units per run and Q 15 runs at 640units per run
Inspections 5 and 3 respectively, with Q (3 inspections per run, each run 640 units)

So Runs are 12000 each (336k/28), divide by 640 to get a per unit value = 18.75
Inspections (192k/8) = 24000. Q has 3. 24000*3 / 9600units = 7.50
Labour/other hrs (230400/115200 total hours) = 2 per hour. Q needs 8 hours, therefore 16.00 per unit.

P Hours 19200 and Q 96000
Runs 13 @ 185units per run and Q 15 runs at 640units per run
Inspections 5 and 3 respectively, with Q (3 inspections per run, each run 640 units)

So Runs are 12000 each (336k/28), divide by 640 to get a per unit value = 18.75
Inspections (192k/8) = 24000. Q has 3. 24000*3 / 9600units = 7.50
Labour/other hrs (230400/115200 total hours) = 2 per hour. Q needs 8 hours, therefore 16.00 per unit.

Yes please add the answer working, its easier and quicker to follow up that way. upon submission if the answer is incorrect the correct working should also pop up..even in an event that the answer is right the working should still show for the sake of comparison

We provide this website free of charge and the current software does not allow the workings to appear.
When we can afford it we will upgrade but until then you should ask here if you have a problem.

We provide this website free of charge and the current software does not allow the workings to appear.
When we can afford it we will upgrade but until then you should ask here if you have a problem.

(I assume, of course, that you have watched the relevant lectures on this website.)

Treasure says

Mr John, thanks kindly for the test very helpful

John Moffat says

You are welcome 🙂

wolde says

In question 5, how can the second choice can be an advantage of ABC? Do ABC costing reduce the total overhead cost? I think it only allocates OH costs in more sensible ways than the traditional absorbtion costing.

John Moffat says

It is the most important advantage of ABC !!

Using ABC forces the company to find out what is causing each of the overheads, and can therefore look for ways of operating more efficiently and therefore reduce overheads.

I do explain this (with an example) in my free lectures on ABC.

wolde says

Thanks!! I am just thinking it from allocation point of view rather than a technique, that is why I missed the concept.

John Moffat says

You are welcome 🙂

guimatsia says

it was great

John Moffat says

Good 🙂

Le says

How useful it is!

John Moffat says

🙂

jankey says

The test is great, thank you its helpful as a practice to all F5 student

jankey says

The test is great, thank you its really helpful

John Moffat says

You are welcome 🙂

(But make sure that you do buy a Revision Kit from one of the ACCA approved publishers – you need to practice as many questions as possible, and the Revision Kits contain lots of exam-standard questions.)

Akua says

please i didnt understand how to calculate for the overhead costs absorbrsd on the basis of labour hours

John Moffat says

I don’t know which of the questions you are referring to. I assume that you watched my free lectures on the absorption of overheads before attempting the test?

Bonno says

Thank you the quiz it was really helpful

John Moffat says

Great 🙂

Samuel Koroma says

Thanks for the quiz. Very helpful

John Moffat says

You are welcome 🙂

Kago says

Why is that in question 3 when we are suppose to say 230400/ (96000+19200)=2 then 2*19200=38400 coz we dealing Q but in the answer you have done the opposite…details for product P where used on the other overheads item….

John Moffat says

The answer is correct. There are 9,600 Q’s and each takes 10 hours, which is 96,000 hours in total.

Arshad says

Where else could we try more of such questions ?

John Moffat says

You must buy a Revision Kit from one of the ACCA approved publishers, as we recommend throughout this website.

Samuel Koroma says

With regards question 2 why is it that traditional absorption costing systems tend to over cost high volume products and under cost low volume products? I know the opposite applies to ABC because overhead costs are now are larger proportion of overall or total cost in modern manufacturing and as a result the proportion of indirect costs is much higher than direct costs.

Samuel Koroma says

I can see my comment has already been answered below. Thanks

John Moffat says

I am glad you found the answer 🙂

Muna says

Dear John,

where is the answer for the above inquire regards question 2?

John Moffat says

It is below.

Tola says

In regards to question 3 I understand how the answer came about but I was wondering how did you get the 115,200 in regards to working out other overheads

John Moffat says

The total labour hours are (2,400 x 8) + (9,600 x 10) = 115,200

I do suggest that you watch our free lecture on ABC!

Tola says

thank you

John Moffat says

You are welcome 🙂

Madiha says

hi,

i would appreciate if you explain how absorption costing under allocates costs to low volume products??

John Moffat says

Here is a very simple example to explain:

Suppose we make 100 units of A and 1,000 units of B.

Using absorption costing (it is on a per unit bases) would absorb the same amount per unit. Therefore in total B would be given 10 times as much overheads as A.

However, it could be that the overheads all related to setting up the machines for production and that they only need to set up the machines once for each product (regardless of how many they produce). Therefore using ABC an equal amount of overheads (in total) should be given to each product.

As a result using absorption costing is giving much lower overheads in total than if we used ABC.

(Again, this is only a very simple example to try and illustrate the point, and it will not necessarily always be the case, but for that sort of reason absorption will tend to end up giving lower overheads to low volume products than ABC.)

duaa says

I didn’t get the general overheads part . I calculated the overhead absorption rate by the formulae TOTAL BUDGETED OH COST DIVIDE IT BY TOTAL BUDGETED LAB/MACHINE HOURS . 230400/115200 . I didn’t get the rest of the part . how and y did u multiply it with 96000 :/

John Moffat says

It would help if you said the number of the question you are referring to!!

The absorption rate for ‘other overheads’ is 230,400/115,200, based on labour hours because the question said to use labour hours. (Machine hours are nothing to do with it).

The total labour hours used for product Q are 96,000 and therefore the total overhead for product Q is 96,000 x 230,400/115,200.

I do suggest that you watch the free lecture on absorption costing before attempting the test.

barvince says

The questions says that the budgeted production units for Product Q is 9600; it then says that the Labour hours per unit for Product Q are 10. Therefore in order to make the budgeted 9600 units you would need to multiply (9600 x 10) = 96000. This gives the total labour hours that would be required to meet the budgeted production. Therefore when you are calculating the “Cost Per Other Overheads” you would then take (96000x$2.00 per unit) = $192,000

This is what I understood from working it out based on the example I had previously done in the lecture. Hope this helps.

le says

Thank you for your great lecture and question!

Could you please help to explain the answer for the question about ‘NOT the advantage of the ABC base costing’?

John Moffat says

The fact that for some overheads it might be impossible to identify a cost driver (and therefore be unable to apply ABC to those overheads) is not going to be an advantage of using ABC.

Forcing us to understand what drives an overheads is an advantage (because we can then try and use it more efficiently); the fact it deals with all overheads is an advantage; the fact that is can lead to a reduction in overheads is an advantage (because of using whatever is causing the overheads more efficiently)

le says

In my so far understanding, total overhead doesn’t change, just allocation amount will change in accordance with the identified cost driver? And now we just find different ways to distribute incurred cost to activities more reasonably.

John Moffat says

The main benefit of using ABC is that identifying what causes overheads can lead to using resources more efficiently and therefore lead to a reduction in the total overheads in the future.

I do suggest that you watch our free lecture on ABC where this is explained.

Stephanie Barclay says

Hi

I am looking at the MCQ

A company manufactures two products, P and Q for this the following information is available:-

Budgeted production: P (2,400 units) Q (9,600 units)

Labour hours per unit: P (8) Q (10)

# of production runs required: P (13) Q (15)

# of inspections during production;: P (5) Q (3)

Total production set-up costs $336,000

Total inspection costs $192,000

Total overhead costs $230,400

Other overhead costs are absorbed on the basis of labour hours.

I have done the following

Production set up $336K/28 ie the # of production runs then I multiply by 15 = 180K

Inspections $192K/8 ie total # of inspections the multiply by 3 = 72K

General overhead $230,400K/18 Labour hours by *10 = 96K

180K+72K+96K = 380K/9.6K = €39.58

Could you tell me where I have gone wrong?

Thanks

yvonne ang says

General overhead should be $230000 / (2400x8hrs)+(9600x10hrs) divided by 96000 units = $192000

# 180k + 72k + 192k = 444k / 9.6k = $46.25

Stephanie Barclay says

Thanks

John Moffat says

You are welcome 🙂

Stephanie Barclay says

Hi

I am looking at the MCQ

A company manufactures two products, P and Q for this the following information is available:-

Budgeted production: P (2,400 units) Q (9,600 units)

Labour hours per unit: P (8) Q (10)

# of production runs required: P (13) Q (15)

# of inspections during production;: P (5) Q (3)

Total production set-up costs $336,000

Total inspection costs $192,000

Total overhead costs $230,400

Other overhead costs are absorbed on the basis of labour hours.

I have done the following

Production set up $336K/28 ie the # of production runs then I multiply by 15 = 180K

Inspections $192K/8 ie total # of inspections the multiply by 3 = 72K

General overhead $230,400K/18 Labour hours by *10 = 96K

180K+72K+96K = 380K/9.6K = €39.58

Could you tell me where I have gone wrong?

Thank

Erica says

Sir, this question :

A company manufactures two products, P and Q for this the following information is available:-

Budgeted production: P (2,400 units) Q (9,600 units)

Labour hours per unit: P (8) Q (10)

# of production runs required: P (13) Q (15)

# of inspections during production;: P (5) Q (3)

Total production set-up costs $336,000

Total inspection costs $192,000

Total overhead costs $230,400

Other overhead costs are absorbed on the basis of labour hours.

The way I calculate it is: i multiply the budgeted production units of the 2 productsnd total them up together becoming 115,200 with its respective labour hours per unit and total them up together becoming 115,200. then divided it with the total overhead costs and got $2. I do not know where have I gone wrong.

John Moffat says

That bit of the answer is correct.

However, two problems:

One is that set-up costs and inspection costs are also overheads.

Second is that the question wants to know the overhead cost per unit of Product Q.

Erica says

and Sir, traditional costing tends to OVER or UNDER allocate costs to low-volume product? Coz here, the correct answer mentioned are both statements true but the answer at the back of your F5 lecture course notes is written as only statement 2 is true. Which is which?

John Moffat says

I don’t know if you are using an old set of the Lecture Notes – maybe there was a typing error that was later corrected.

However, both the lecture notes and this test give the same correct answer which is that both statements are true.

Traditional costing tends to under-allocate costs to low-volume products.

Erica says

Why does it tend to under-allocate costs to low products?

John Moffat says

Here is a very simple illustration.

Suppose a business produces 100 units of product A and 1000 units of product B.

The total overheads are $1,100.

Tradition costing will absorb the overheads at $1 per unit. So a total of $100 for product A and a total of $1,000 for product B.

Suppose now that the overheads of $1100 are set-up costs, and each product needs 1 set-up regardless of how many are produced (so 2 set-ups in total).

Since the cost per set-up is $550, the total overheads should (under ABC) be $550 for A and $550 for B.

The problem does not always exist, but traditional absorption does tend to under allocate costs to low volume products as I have illustrated above.

Erica says

But with ABC, costs will not be under-allocated to low volume products (fair allocation of costs), is that what you were trying to say?

John Moffat says

I repeat, absorption costing does tend to under-allocate costs to low volume products (as compared to ABC).

Gary says

I do not understand this one either.

My workings:

P Hours 19200 and Q 96000

Runs 13 @ 185units per run and Q 15 runs at 640units per run

Inspections 5 and 3 respectively, with Q (3 inspections per run, each run 640 units)

So Runs are 12000 each (336k/28), divide by 640 to get a per unit value = 18.75

Inspections (192k/8) = 24000. Q has 3. 24000*3 / 9600units = 7.50

Labour/other hrs (230400/115200 total hours) = 2 per hour. Q needs 8 hours, therefore 16.00 per unit.

Q = $42.25?

Please help.

Gary says

I do not understand this one either.

My workings:

P Hours 19200 and Q 96000

Runs 13 @ 185units per run and Q 15 runs at 640units per run

Inspections 5 and 3 respectively, with Q (3 inspections per run, each run 640 units)

So Runs are 12000 each (336k/28), divide by 640 to get a per unit value = 18.75

Inspections (192k/8) = 24000. Q has 3. 24000*3 / 9600units = 7.50

Labour/other hrs (230400/115200 total hours) = 2 per hour. Q needs 8 hours, therefore 16.00 per unit.

Q = $42.25?

Please help.

Krebby says

Yes please add the answer working, its easier and quicker to follow up that way. upon submission if the answer is incorrect the correct working should also pop up..even in an event that the answer is right the working should still show for the sake of comparison

John Moffat says

We provide this website free of charge and the current software does not allow the workings to appear.

When we can afford it we will upgrade but until then you should ask here if you have a problem.

Leonis Nyuma Sesay says

What is the solution to question 5?

John Moffat says

I am afraid that until now the questions have been appearing in a random order (this has now been corrected).

But it does mean that what you got as question 5 could appear as question 1 for other people.

So I don’t know which question you mean.

Please say a bit more about what was in the question and then I will help you 🙂

(As I say – the problem has now been corrected, and so it won’t be a problem in future).

afazel says

Please add the answers working for students to work out the answers in MCQ questions

John Moffat says

We provide this website free of charge and the current software does not allow the workings to appear.

When we can afford it we will upgrade but until then you should ask here if you have a problem.

(I assume, of course, that you have watched the relevant lectures on this website.)