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Hi John,
Appreciate your guidance on the statement made in BPP book,
”ABC should not be regarded as variable cost that vary with the volume of cost driver, some activity cost may be variable but many are not.Cost driver effect or influence total cost of the activity but not in a direct variable cost relationship between activity level and cost”
I don’t understand how activity cost vary with the cost driver ? i thought resource cost are allocated and apportioned in the activity cost centre and that the cost driver are just means of absorbing overhead to products
In future you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.
As I stress in my lecture, the main benefit of using ABC is that by identifying what is causing costs (i.e. the cost driver) we may be able to operate more efficiently and therefore reduce the total cost.
For example, suppose we produce 100,000 units in batches of 1,000 each time, and the total cost of setting up machines is currently $50,000 – this is the cost of the labour etc involved in setting up the machines each time we produce a batch. We are having to spend the $50,000 because we are setting up machines 100 times for production of this product. Having identified that it is the number of batches that is causing this cost, we might see if it was possible instead to produce in batches of (say) 2,000 each time. That would mean we would only need to set up the machine 50 times, and as a result we might find we need less labour etc. and save money as a result.
Do please watch the lectures. They are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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