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Activity Based Costing part 1 – ACCA Performance Management (PM)

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  1. Hello John

    A company is changing its costing system from traditional absorption costing based on labour hours to Activity Based Costing. It has overheads of $156,000 which are related to taking material deliveries.

    The delivery information about each product is below.
    Total units required of product X;1,000 Y; 2,000 Z;3,000
    Delivery size X; 200 Y; 400 Z;1,000

    Total labour costs are $360,000 for 45,000 hours.

    Each unit of each product takes the same number of direct hours.
    Assuming that the company uses the number of deliveries as its cost driver, what is the increase or decrease in unit costs for Z arising from the change from Absorption Costing to Activity Based Costing?

    ..A.. Decrease of $14 per unit
    ..B.. Increase of $14 per unit
    ..C.. Decrease of $30 per unit
    ..D.. Increase of $30 per unit

    ANSWER FROM THE KIT

    CORRECT ANSWER IS A

    Absorption costing
    Since the time per unit is the same for each product, the overheads per unit will also be the same.
    $156,000 ÷ 6,000 units = $26

    Activity based costing Number of deliveries for X (1,000/200)= 5
    Number of deliveries for Y (2,000/400)= 5
    Number of deliveries for Z (3,000/1,000) = 3
    Total = 13
    Cost per delivery = $156,000/13 = $12,000
    Cost per unit of Z = ($12,000/3,000 units) × 3 deliveries = $12

    Decrease = $26 – $12 = $14.

    ———————————————————————————-

    my question is about the absorption cost per unit.

    here is my answer
    Absorption cost per unit= BA/BO = 156000÷45000 hours = $3.46 i used total hours as a base.

    and here is how kit answered;

    $156,000 ÷ 6,000 units = $26

    i don’t understand why he took a total number of production as base to compute overhead adsorption rate.

    i would like to tank to you in advance john.

    • Dear As i Understand from The questing is that absorption base use by the company as previous the number of deliveries. as mention in question
      “It has overheads of $156,000 which are related to taking material deliveries.”

      so the total of deliveries: X;1,000 Y; 2,000 Z;3,000 = 6,000

      $156,000/6,000 = $26

      hope i answer it right. 🙂

    • Hi,
      If I am right.. explaining in detail
      total overhead cost = 156,000
      total hours = 45,000
      therefore, overhead absorption rate = 156,000/45000 =3.47

      labour hour per unit of Z = 45,000/6000 = 7.5 (pls check the labour hours per unit in example 1 of the open tuition notes)
      (this question doesnt specify how the labour hours are divided btw the 3 products, but it specifies how labour hours are divided btw each unit of each product. i.e, each unit of x,y and z has the same labour hour per unit. total number of units = 1000 + 2000 + 3000)

      finally, overhead per unit of Z = 3.47 x 7.5 = 26

      To sum up, what we have done is (156,000 x 45,000) / (45,000 x 6000)
      which in simple format is 156,000/6000 = 26

  2. Hi sir,
    Can I use these lectures for September 2020 exams, if not when will the lectures be updated for September 2020
    The books of bpp and kaplan available in the market are upto June 2020
    Do you have any idea when the updated books for September 2020 will be available.

  5. Hi sir i’m struggling to apply ABC its as though every question i come across it seems different please how do i get better at this ive brought a year membership with learn signal but their video is too short and doesnt cover enough of ABC

  7. Assalam o alikum Sir, how are you? First of all thank you very much for such nice and clear lectures. Sorry i have not yet listen to these PM lectures but watched Management Accounting lectures and that was really great!. Sorry for this long message. i want to ask that if I don’t buy any study material and just read Opentuition notes, is it enough for me or i should buy any other study material?

    • In future please ask this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture 🙂

      If you watch my free lectures together with the lecture notes, then you do not really need a Study Text.

      However it is vital that you buy a Revision Kit from one of the ACCA approved publishers. They are full of past exam and other exam-standard questions for practice, and practice is essential for passing the exam.

    • If you are watching all the lectures then you do not really need a Study Text, but if you do buy one then BPP and Kaplan are both ACCA approved publishers and both are good.(If you click on the link ono the right hand side of this page then you can get a 20% discount from BPP).

      What is more important is that you buy a Revision Kit. That contains lots of past exam and other exam standard questions for practice, and practice is vital to passing the exam.

  14. yousufkarai: Yes, of course – we always ensure that our lectures are up-to-date for the upcoming exams.
    There are some syllabus additions from September onwards, but these are not substantial. All the current lectures are applicable for June, September and December exams, but some additional lectures will be added later for the September and December exams.

  17. Hi there

    Thank you John for the lectures.

    Could you please set the Course Notes on background.
    That would be very helpful.

    Thank you very much!

    Best wishes,

    Muhammad Amin

  18. Thank you John! Today I have passed this exam. It is all because of your effective way of conveying knowledge, which truly reflects your sincerity with teaching profession. Thank you once again, stay blessed!

    Best regards
    Ahsan from Pakistan

  19. Hii Sir,
    I am really really grateful to you …..you are such an inspiration and awesome teacher who has made my concepts clear i today passed my F5 with 60 marks … thankyou so much sir ! I owe them to you since i based my whole studies on your lectures and prepared the exam in 14 days.

  20. Thanks John. Are you trying to say that traditional absorption costing absorb overheads in an arbitrary way thereby producing inaccurate product cost and distorted profit figures?

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