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Hello Sir Hope you are doing well, can you please help me in the following question of Kaplan.
Sir is the following statement true or false.
“ABC can’t help with improving our understanding of the incremental costs of a product, as it just averages costs for the entire production”.Ans – Statement is False. “ABC can help with determining a more accurate incremental cost, however it’s accuracy depends on identifying appropriate cost drivers”.
But Sir in one of the question of B.P.P somewhere they have provided the following explanation.
“It is a mistake to associate activity-based costs with the variable costs of an activity. Some of the costs may be variable in the short run, but others are not. So ABC costs should not be treated as relevant costs for the purpose of short-term decision-making. It is more appropriate to think of ABC as a form of absorption costing, where overheads are allocated to activities and products on a more meaningful basis than with traditional absorption costing”.
So Sir I’m a bit confused as to what should be the right answer. Can you please help me
ABC is mainly concerned with absorbing the fixed overheads in the most sensible way. The total fixed overheads are not affected by the level of activity. However when using ABC we need to identify what it is that is causing the overheads and doing this means that we may be able to reduce the total fixed overheads.
Questions on this in Paper MA are very limited. It is much more examinable in Paper PM and if you want a fuller explanation then do watch my Paper PM lectures on ABC.
Thankyou Sir :).
Sir just want to confirm, have you explained about this part of ABC (i.e. help in understanding the incremental cost and relevant costing) in PM playlist?
In case yes I’d definitely have a look at it.
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