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Dear Tutor
I was exempted the PM exam and thus have found it hard with some of the foundational chapters such as ABC. Is it okay to assume that you can’t be asked to calculate ABC at APM level?
What are your tips for understanding APM if so?
Thanks
I don’t think it’s safe to assume that.
ABC is specifically mentioned in syllabus area A 6 c in relation to environmental accounting. In addition PM is stated as being underpinning knowledge for APM. I think ABC can be of particular use in performance management because if costs are not accurately estimated how can performance be assessed.
Out chapter 7 notes and lectures (time point 19.30) cover ABC.
Pricing, transfer pricing and variance analysis are also PM topics cropping up again in APM. For variance analysis (basic low-level costing) it is more likely that you would be expected to interpret results; pricing and transfer pricing are more sophisticated techniques that are potentially very relevant.
Zambian Airways is an airline based in Zambia servicing both domestic and international routes. Assume that the airline currently serves the Chipata, Kasama and Kinshasa routes. The Management Accountant has compiled the following information about each of the three routes:
Chipata Kasama Kinshasa
Total Number of Passengers 7200 14600 4 000
Total Number of flights 360 730 200
Total Revenues K14 400 000 K43 800 000 K16 000 000
Number of flight miles per flight 171 232 378
These three routes are serviced by an individual support division. The following activities with the associated costs have been identified:
Overhead Cost Overhead Allocation Base
Engineering Support K6 000 000 Number of flights
Ground handling support K4 000 000 Number of passengers
Office Administration K 700 000 Number of flights
Marketing K 800 000 Number of passengers
Other K 500 000 Total revenues
The following costs can be traced to each of the three routes in a convenient manner:
Chipata Kasama Kinshasa
Jet Fuel K4 000 000 K18 000 000 K3 000 000
Crew costs K2 000 000 K2 500 000 K1000 000
Other Costs K1 000 000 K1 500 000 K2 000 000Questions:
A. Calculate the total cost assigned to each of the three routes using simple costing, assuming that overheads are allocated according to flight miles [3Marks]
B. Calculate the cost per passenger assigned to each of the three routes using simple costing, assuming that overheads are allocated according to flight miles [3 Marks]
C. Calculate the total cost assigned to each of the three routes using Activity Based Costing
[20 Marks]
D. Calculate the cost per passenger assigned to each of the three routes using Activity Based Costing [3 Marks]
E. Calculate the profit per passenger for each of the routes using Simple and Activity Based Costing. [6 Marks]
F. Identify one alternative cost allocation base for the first four activities identified in this problem and explain the cause and effect relationship between the indirect cost and your chosen cost allocation base. [8 Marks]
G. Why is Activity Based Costing preferred over simple costing? Give two brief reasons based on your answers provided for the questions above. [7 Marks]
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