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Problem number 2 in APM exam March 2019
https://cn.accaglobal.com/uploads/talk/20210204165926_1029.pdf
The sample answer stated that :”The use of ABM may have led to a faster resolution of these initial quality problems by identifying the causes, or drivers, of the product cost and taking action to manage these.”, which related to the following sentences in the scenario:
“Five years ago, Vunderg developed a range of small garden glasshouses, for non-commercial use, made of attractive and high quality materials. After initial quality problems due to the use of materials and manufacturing methods new to Vunderg, glasshouse production is now efficient, quality is high and the glasshouses now command premium prices.”
I doubt about the answer’s statement, as ABM only help to make cost of components more visible, thereby optimizing the production process to improve efficiency, but it can not help to identify the causes of existing quality problems.
What do you think about this statement?Activity based costing changes the way fixed costs are accounted for. It does not change the treatment of variable costs. ABC seeks to discover the activities which cause fixed costs ie the cost drivers (because fixed costs are never really fixed: they depend on something to cause them).
If quality costs (inspection, rework, rejected items, returned items) are properly analysed eg to discover the cost incurred when an item is returned and the cost of preventing errors and inspecting for errors, then the company would understand its costs better and management should make better decisions based on ABC ie ABM.
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