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Activity Based Costing part 2 – ACCA Performance Management (PM)

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  8. Dear John
    While proportionating machining cost to each product, why can’t we simply divide the total machine cost by total number of production units (A+B+C) in combined and then outcome to be multiplied by the total production of A then total production of B and then total production of C. Since the time required to produce any of the category unit is same i.e. 2 hours per unit. What is wrong in this logic, please guide

    • Given that the time for each of them is the same, then no problem – this will obviously give the same answer and nobody is saying that there is anything wrong 🙂

      However equally obviously, if the time for units of each product was different, then this would not work.

  9. Hello John,
    Thanks for the Lectures, your efforts in making us understand is deeply appreciated.
    Please, Why is it wrong to calculate Machining hours like others, I.e 55,000/(2+2+2) what is so special about Labour hours?
    The calculation of this labour hours gets me confused in all topics it appears in.
    Thanks.

  10. Hi Sir i have a doubt in the above mentioned question
    in the question the total overhead is 190000 and the same we divide it into A,B,C 78040,94690 and 17268 when we take the total of a+b+c total amount will come 189998 there is a difference of 2 is it okey?

  11. Dear sir,
    I have a question

    Asume that number of products equal number of sales
    We have
    Total Profit is 20000*1.1+25000*1.21+2000*(-3.63)=44990 (under ABC costing)
    Total Profit is 20000*(-0.68)+25000*2.16+2000*2.16=44720 (under absorption transition costing)
    Why have this different in case total revenue and total cost are the same

    Thanks you

    Phuong Lan

  12. When you calculated the Machining overhead you made a mistake;
    you said B and C had 25000×2 and 2000×2 however these should have been x1

    correct working should be:
    A) 20000×2 =40000
    B) 25000×1 =25000
    C) 2000×1 = 2000
    Total 67000 (the same figure used in question (a))
    55000/67000= 0.82

    so machining should be:

    A $32840 B $20525 C 1642

  13. Thank you for the lecture, it was very useful. In your introductory lecture you mentioned Section C questions wont be asked from costing topics. I assumed the first 3 chapters are linked to costing. Please confirm if I am right to assume that we wont have any section C questions from the 1st 3 chapters?

    • The examiner states in the syllabus (which is available on the ACCA website) that the two 20 mark questions in Section C of the exam will come from decision making techniques, budgeting and control and/or performance measurement and control areas of the syllabus. These questions may also include requirements related to the information systems area of the syllabus.

  15. If we skipped a step and went straight to apportioning the cost (for ABC Costing) , would we lose marks?

    For example, i would not have gone to get each overhead cost total per Set up, i would have just said, 10 divided by 25 is 40% and then multiplied the 90 000 by 40%, and gone on like that. its gets you to the same end result. will we be penalized if we do it this way. does each step count for marks or is it just the final answer that really matters?

    Another question, using the a and b, the sale price (therefor revenue) and the total costs remain the same. it’s just two different ways of allocating the costs, right? so shouldnt the end result be the same? shouldnt the profit on all items (therefor adding the P/L for each item unit) be the same for both A and B. i dont fully understand why in a we are making a profit of 1.64 per unit (all three added) and in b we are making a loss of 1.42.

    ultimately the income and expense was the same, it was just allocation of expenses that differed. I really dont know why the profit or loss amount in total changed?

    Perhaps i missed something…

    • 1. By all means miss out the steps (unless it is specifically asked for in the question). Just make sure if it is in Section C that you still show workings in case you make an arithmetical mistake.

      2. Assuming they sell all they they produce, then the total profit will stay the same. You can’t just add together the unit profits. The total profit is calculated by multiplying the units by the profit per unit for each product separately, and then adding the totals together.

      • How do you calculate overhead cost when giving percentages for each products.

        Used to calculating rate per each cost drivers, however, in a question, the cost drivers for Engineering Overhead cost of $836,000.00 (For example) wasn’t given rather the question provided 40%, 35% and 25% for products 1, 2 and 3 respectively.

        How do you solve this?

        Please reply asap

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

        Without having seen the whole question, on what you have typed you would take 40% x $836,000 for product 1, and divide by the number of units produced of product 1 to get the cost per unit for that product. Same logic for the other two products.

  16. Another question, using the a and b, the sale price (therefor revenue) and the total costs remain the same. it’s just two different ways of allocating the costs, right? so shouldnt the end result be the same? shouldnt the profit on all items (therefor adding the P/L for each item unit) be the same for both A and B. i dont fully understand why in a we are making a profit of 1.64 per unit (all three added) and in b we are making a loss of 1.42.

    ultimately the income and expense was the same, it was just allocation of expenses that differed. I really dont know why the profit or loss amount in total changed?

    Perhaps i missed something…

  17. If we skipped a step and went straight to apportioning the cost (for ABC Costing) , would we lose marks?
    For example, i would not have gone to get each overhead cost total per Set up, i would have just said, 10 divided by 25 is 40% and then multiplied the 90 000 by 40%, and gone on like that. its gets you to the same end result. will we be penalized if we do it this way. does each step count for marks or is it just the final answer that really matters?

    • The labour per unit is part of the costing, but is not activity based (ABC only applies to the overheads).

      The question gives the labour hours per unit, and also gives the rate per hour – so you must multiply the two together!

      (I assume that you do have the free lectures notes containing the example in front of you?)

  19. Thank you John. I think ABC is much more fairer and appropriate than traditional AC when dealing with overheads based on the activities that give rise to the cost. As a result, this should lead accurate cost per unit and hence better decision making. However, is it in all cases one can expect the results of ABC to be different from AC?

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