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Comments

    • The statement is saying that using ABC means that it results in having a good understanding of why overheads are occurring.
      This is true – as I explain in my lectures, it makes the company find out what is causing the overheads (the cost driver).

    • If you watch the example that I work through in my lecture, you will see that low volume products tend to have more costs than high volume products. ABC does allocate more or the overheads to low-volume products, but traditional absorption costing allocates the same unit cost to all of the products regardless of the volume of each.

      • Hi John,

        I must say i made the same mistake, i have answered this question as statement 2 only being correct. I think it may be the wording that has tripped me up, but below was my thought process:

        If you have £100,000 overheads and 2 products of say 800 and 200. Traditional would just split it 50/50, so £50,000 to each? Would this not therefore over-allocate overheads to the low volume and under-allocate to the high volume?
        If you have under-allocated surely you haven’t allocated enough, but in fact you have allocated too much?

  10. Hi Sir,

    Just wanted to thank you for the lectures and the test for chapter 1. I’m a returning student within ACCA and this has jump started my studies immensely. Looking forward to continue with the lecture notes and the revision kit afterwards. Out of curiosity, is there something I should look out for when presenting the results in the computer based exam setup? I have structured and linked my workings accordingly and making sure that they can be followed through easily however (since i’m not much of an imaginative person) it can become very long (especially in the workings section so you would go back and forth within the same sheet). What i did is that i set up the first columns in the spreadsheet with the answer and a second set of columns with the workings one following the other and referencing every line with the correct working section. Is there something else that the examiner would require out of me to make it easier for them to follow through and understand better my reasoning?

    Thanks in advance for your help and guidance 🙂

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

      For sections A and B, your workings are not marked – only the answer – so it doesn’t matter how you do them.
      For Section C, it is the workings that are important and you get marks even if you make a mistake somewhere. How you show the workings does not matter, but time is an issue so you do not want to spend too long. Where possible set up formulae within the spreadsheet cells – the marker will be able to check what you have done. Best is to try the specimen exams on the ACCA website.

  16. this is brilliant, love the lectures and the quiz but would this be enough to pass the exams with ofcourse revision kit and would i be easily to able to do activity based costing questions in the exam kit after taking the lecture and reading open tution notes?

  17. Thanks for the lecture and the quiz! I can see that some of the comments are a couple of years old which suggests that the quiz also is. I take it the material is still as relevant as then?

  18. Thank you Mr. John, this really jump-started my reading & understanding ABC. Though I could not easily & timely get the answers but was glad my reasoning returned & I was getting a bit confident. God bless u IJN

  20. In question 5, how can the second choice can be an advantage of ABC? Do ABC costing reduce the total overhead cost? I think it only allocates OH costs in more sensible ways than the traditional absorbtion costing.

    • You are welcome 🙂

      (But make sure that you do buy a Revision Kit from one of the ACCA approved publishers – you need to practice as many questions as possible, and the Revision Kits contain lots of exam-standard questions.)

  28. Why is that in question 3 when we are suppose to say 230400/ (96000+19200)=2 then 2*19200=38400 coz we dealing Q but in the answer you have done the opposite…details for product P where used on the other overheads item….

  30. With regards question 2 why is it that traditional absorption costing systems tend to over cost high volume products and under cost low volume products? I know the opposite applies to ABC because overhead costs are now are larger proportion of overall or total cost in modern manufacturing and as a result the proportion of indirect costs is much higher than direct costs.

    • Here is a very simple example to explain:

      Suppose we make 100 units of A and 1,000 units of B.

      Using absorption costing (it is on a per unit bases) would absorb the same amount per unit. Therefore in total B would be given 10 times as much overheads as A.

      However, it could be that the overheads all related to setting up the machines for production and that they only need to set up the machines once for each product (regardless of how many they produce). Therefore using ABC an equal amount of overheads (in total) should be given to each product.

      As a result using absorption costing is giving much lower overheads in total than if we used ABC.

      (Again, this is only a very simple example to try and illustrate the point, and it will not necessarily always be the case, but for that sort of reason absorption will tend to end up giving lower overheads to low volume products than ABC.)

  33. I didn’t get the general overheads part . I calculated the overhead absorption rate by the formulae TOTAL BUDGETED OH COST DIVIDE IT BY TOTAL BUDGETED LAB/MACHINE HOURS . 230400/115200 . I didn’t get the rest of the part . how and y did u multiply it with 96000 :/

    • It would help if you said the number of the question you are referring to!!

      The absorption rate for ‘other overheads’ is 230,400/115,200, based on labour hours because the question said to use labour hours. (Machine hours are nothing to do with it).

      The total labour hours used for product Q are 96,000 and therefore the total overhead for product Q is 96,000 x 230,400/115,200.

      I do suggest that you watch the free lecture on absorption costing before attempting the test.

    • The questions says that the budgeted production units for Product Q is 9600; it then says that the Labour hours per unit for Product Q are 10. Therefore in order to make the budgeted 9600 units you would need to multiply (9600 x 10) = 96000. This gives the total labour hours that would be required to meet the budgeted production. Therefore when you are calculating the “Cost Per Other Overheads” you would then take (96000x$2.00 per unit) = $192,000

      This is what I understood from working it out based on the example I had previously done in the lecture. Hope this helps.

    • The fact that for some overheads it might be impossible to identify a cost driver (and therefore be unable to apply ABC to those overheads) is not going to be an advantage of using ABC.

      Forcing us to understand what drives an overheads is an advantage (because we can then try and use it more efficiently); the fact it deals with all overheads is an advantage; the fact that is can lead to a reduction in overheads is an advantage (because of using whatever is causing the overheads more efficiently)

      • In my so far understanding, total overhead doesn’t change, just allocation amount will change in accordance with the identified cost driver? And now we just find different ways to distribute incurred cost to activities more reasonably.

      • The main benefit of using ABC is that identifying what causes overheads can lead to using resources more efficiently and therefore lead to a reduction in the total overheads in the future.
        I do suggest that you watch our free lecture on ABC where this is explained.

  35. Hi

    I am looking at the MCQ

    A company manufactures two products, P and Q for this the following information is available:-

    Budgeted production: P (2,400 units) Q (9,600 units)
    Labour hours per unit: P (8) Q (10)
    # of production runs required: P (13) Q (15)
    # of inspections during production;: P (5) Q (3)

    Total production set-up costs $336,000
    Total inspection costs $192,000
    Total overhead costs $230,400

    Other overhead costs are absorbed on the basis of labour hours.

    I have done the following

    Production set up $336K/28 ie the # of production runs then I multiply by 15 = 180K
    Inspections $192K/8 ie total # of inspections the multiply by 3 = 72K
    General overhead $230,400K/18 Labour hours by *10 = 96K

    180K+72K+96K = 380K/9.6K = €39.58

    Could you tell me where I have gone wrong?

    Thanks

  36. Hi

    I am looking at the MCQ

    A company manufactures two products, P and Q for this the following information is available:-

    Budgeted production: P (2,400 units) Q (9,600 units)
    Labour hours per unit: P (8) Q (10)
    # of production runs required: P (13) Q (15)
    # of inspections during production;: P (5) Q (3)

    Total production set-up costs $336,000
    Total inspection costs $192,000
    Total overhead costs $230,400

    Other overhead costs are absorbed on the basis of labour hours.

    I have done the following

    Production set up $336K/28 ie the # of production runs then I multiply by 15 = 180K
    Inspections $192K/8 ie total # of inspections the multiply by 3 = 72K
    General overhead $230,400K/18 Labour hours by *10 = 96K

    180K+72K+96K = 380K/9.6K = €39.58

    Could you tell me where I have gone wrong?

    Thank

  37. Sir, this question :

    A company manufactures two products, P and Q for this the following information is available:-

    Budgeted production: P (2,400 units) Q (9,600 units)
    Labour hours per unit: P (8) Q (10)
    # of production runs required: P (13) Q (15)
    # of inspections during production;: P (5) Q (3)

    Total production set-up costs $336,000
    Total inspection costs $192,000
    Total overhead costs $230,400

    Other overhead costs are absorbed on the basis of labour hours.

    The way I calculate it is: i multiply the budgeted production units of the 2 productsnd total them up together becoming 115,200 with its respective labour hours per unit and total them up together becoming 115,200. then divided it with the total overhead costs and got $2. I do not know where have I gone wrong.

      • and Sir, traditional costing tends to OVER or UNDER allocate costs to low-volume product? Coz here, the correct answer mentioned are both statements true but the answer at the back of your F5 lecture course notes is written as only statement 2 is true. Which is which?

      • I don’t know if you are using an old set of the Lecture Notes – maybe there was a typing error that was later corrected.

        However, both the lecture notes and this test give the same correct answer which is that both statements are true.

        Traditional costing tends to under-allocate costs to low-volume products.

      • Here is a very simple illustration.
        Suppose a business produces 100 units of product A and 1000 units of product B.
        The total overheads are $1,100.
        Tradition costing will absorb the overheads at $1 per unit. So a total of $100 for product A and a total of $1,000 for product B.

        Suppose now that the overheads of $1100 are set-up costs, and each product needs 1 set-up regardless of how many are produced (so 2 set-ups in total).
        Since the cost per set-up is $550, the total overheads should (under ABC) be $550 for A and $550 for B.

        The problem does not always exist, but traditional absorption does tend to under allocate costs to low volume products as I have illustrated above.

      • I do not understand this one either.

        My workings:

        P Hours 19200 and Q 96000
        Runs 13 @ 185units per run and Q 15 runs at 640units per run
        Inspections 5 and 3 respectively, with Q (3 inspections per run, each run 640 units)

        So Runs are 12000 each (336k/28), divide by 640 to get a per unit value = 18.75
        Inspections (192k/8) = 24000. Q has 3. 24000*3 / 9600units = 7.50
        Labour/other hrs (230400/115200 total hours) = 2 per hour. Q needs 8 hours, therefore 16.00 per unit.

        Q = $42.25?

        Please help.

    • I do not understand this one either.

      My workings:

      P Hours 19200 and Q 96000
      Runs 13 @ 185units per run and Q 15 runs at 640units per run
      Inspections 5 and 3 respectively, with Q (3 inspections per run, each run 640 units)

      So Runs are 12000 each (336k/28), divide by 640 to get a per unit value = 18.75
      Inspections (192k/8) = 24000. Q has 3. 24000*3 / 9600units = 7.50
      Labour/other hrs (230400/115200 total hours) = 2 per hour. Q needs 8 hours, therefore 16.00 per unit.

      Q = $42.25?

      Please help.

  38. Yes please add the answer working, its easier and quicker to follow up that way. upon submission if the answer is incorrect the correct working should also pop up..even in an event that the answer is right the working should still show for the sake of comparison

    • I am afraid that until now the questions have been appearing in a random order (this has now been corrected).

      But it does mean that what you got as question 5 could appear as question 1 for other people.
      So I don’t know which question you mean.

      Please say a bit more about what was in the question and then I will help you 🙂

      (As I say – the problem has now been corrected, and so it won’t be a problem in future).

    • We provide this website free of charge and the current software does not allow the workings to appear.
      When we can afford it we will upgrade but until then you should ask here if you have a problem.

      (I assume, of course, that you have watched the relevant lectures on this website.)

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