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PM Chapter 1 Questions Activity based costing

 

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  2. Dear Sir,

    For question 3, I wrongly match the cost driver of setup cost and other overhead costs; how can we identify or co-relate the overhead costs to each cost driver? It is because for Chaper 1 of example 1, each cost driver can easily match with each overheads cost.

  4. Referring to Question 2! How a traditional costing method could under-allocate overheads to low-volume product? The exercise we did earlier, we over-allocated overheads to product A due to which it turned out to be a loss-making, however, under ABC, we realised that it was not product A that was loss-making rather it was product C! kindly, shade some light on this query.

    • In the example that I work through in the lecture, the low volume product is product C (with only 2,000 units produced). Tradition absorption costing allocated few overheads to this product than when we used ABC – traditional absorption costing under-allocated the overhead costs to product C.

    • Yeh, sometimes the cost of implementing ABC is greater then benefits, which means the cost per unit is similar to Absorption costing, this might be because the the product is regular & does not specific activity included.

    • No – our tests are only meant to be quick tests as students are studying. We make it clear that all need to buy a Study Text from one of the ACCA Approved Publishers because they are full of past exam and other exam standard questions.

    • We use the total hours for each product (not the hours per unit).
      So the total hours for P are 2,400 x 8 = 19,200, and for Q are 9,600 x 10 = 96,000. So in total 115,200 hours.

      (It is the same idea as in the example I work through in my free lecture.)

    • Thank you for your comment.
      BPP and Kaplan are the ACCA Approved Publishers and their books are both as good as each other. I myself have the BPP Revision Kit (and you can get a 20% discount from BPP if you click on the BPP link that is on most of the pages on our website).

  12. sir “number of inspection during production” is a bit confusing because it might refer to both “the number of inspection during the whole production” in which case total inspection will be 8 (3 + 5) but if it is assumed that “the number of inspection during each of the production run” which i did, the total inspections would be 110 (13*5+15*3). my question is how do we avoid these confusions because in some other instances if you dont assume the answer turns out wrong.

      • i did watch the lecture before attempting the test, but i found the wording of the question a bit confusing. to state it simply how do we know the inspections are for the whole production and not for the individual production runs?

      • If it was as you were thinking then it would have said “number of inspections per production run”. The fact it says number of inspections during production means the whole production (not per run) 🙂

    • I do understand that sometimes the wording can confuse (especially when reading quickly because of the time pressure in the exam) but there is no rule I can give you as regards avoiding the confusion – it depends on the wording (this was a past exam question). Here, as I wrote before, it would have said production run if it was meaning the number of inspections per production run (and to have 5 inspections in each production run would seem rather unlikely anyway 🙂 )

  13. in the last question it says which of the following is not an advantage of ABC, although all accept for 3rd are advantages but 3rd is a disadvantage.
    when it says ”not an advantage” doesn’t necessarily mean that it would be a disadvantage.
    in short the third option is a disadvantage

    it is possible that if something is ”not an advantage” it may not be a disadvantage either.

    • I assume that you are referring to the choice “it can lead to a reduction in total overheads” (which will not also appear as the third choice because the software deliberately changes the order).

      If it is this statement that you are referring to, then it is certainly not a disadvantage. It is the main advantage of using ABC as I explain in my free lectures on this.

      The correct answer is that “it may be impossible to allocate all overheads to specific activities” because it is a fact and is certainly not an advantage.

      • My understanding is that the total of the overheads stays the same, just the allocation of the overheads to individual products changes. Or is it meant to say that the total of overheads allocated to individual products might reduce.

      • The calculations will not change the total overheads.

        However, as I explain in my free lectures, the main benefit in practice for using ABC is that it forced the company to find out what is causing the overheads. That leads to using them more efficiently and results in a saving of overheads.

        Again, I explain this in my lecture with examples.

  14. Hello,

    For the first question, while calculating the total cost for product X why is 20000 divided by 1000?
    Also I am confused witht the second question, can someone please explain why both the statements are right?

      • What nomanashaf has written is correct for the first question.

        As far as the second question is concerned, statement 2 is the definition of a cost driver as I explain in my free lectures on ABC.

        Statement 1 is best explained by looking back at the example in the notes that I work through in my lecture. Product C is a much lower volume than the other 2 products. Using traditional absorption the overheads are $2.84 per hour whereas with ABC the overheads are $8.63. I do explain in the lecture why this has happened.

  16. Hi everyone,
    I am quite confused with the solutions in the task with products P and Q. In the feedback, you arrived to 46.25 (the same as I indicated as a correct answer, but it was marked as wrong answer, saying that the correct answer is 140.64. I am bit confused. Thank you in advance for clarifications!

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