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VPS is a large manufacturing business that is introducing an activity based costing system into its business. VPS ships components via its own logistics operation to its central manufacturing centre in Glasgow from a wide variety of locations. It is attempting to identify the correct cost driver for the cost pool called ‘component handling’.
Which of the following would be the correct figure to use?
A Average components per unit
B Total number of components shipped
C Average distance travelled by a component
D Total components-distance travelledAccording to examiner “A total figure is needed and assuming distance travelled increases the costs of handling, then the correct answer is D”
But if it,s assumption based then why B cannot be the right answer?
Exactly because of what the examiners answer has written!!!
The total cost will depend on both the number of components and how far they have to travel (given there are many different locations).
Answer B is ignoring the distance and only considering the number of components.
Answer D is considering both.
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