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Hi john,
I understand that ABC has 4 stages-
1) Identifying the organisation major activities
2)Collect the cost associated with each activity in cost pool. i.e allocate and apportion resource cost
3)Identify the cost driver
4)Charge the cost to the products on the basis of the cost driverAnd from doing the past papers and reading the text book, i have noted that activity cost that relate to production volume such as power cost or rent etc are traced directly to products using labour hours or machine hours.
Question- aren’t these power cost or rent a resource which should be allocated and apportioned to activity cost pool ( as highlighted in stage 2 above) ? if so, then why are we absorbing it directly to products on machine or labour hour basis ?
Would appreciate your guidance on this
As I explain in my free lectures, in practice it is not alway possible to identify a specific cost driver for all of the costs, in which case companies tend to use normal absorption costing on those cost which means absorbing them over either labour hours or machine hours.
Exam questions always make it clear what the cost drivers are and if any of the costs do not have a specific driver then the question again makes it clear how they should be absorbed.
However, as far as power is concerned, if the question says that it is the power to drive the machines, then machine hours would be a suitable cost driver.
If you think you have found a past exam question that doesn’t make it clear then say which one and I will explain why it is dealt with the way it is 🙂
I do suggest that you watch my free lectures – they are a complete free course for Paper PM and cover everything needed to be able to pass the exam well. Also, do not rely solely on past exams for practice – it is vital that you use a Revision Kit from one of the ACCA approved publishers. This is for two reasons, one is that the syllabus and the format of the exams has changed over the years and the Revision Kits only include those questions that are relevant to the current syllabus. The other reason is that the past exams on the ACCA website give nothing like enough practice – the Revision Kits contain many more questions 🙂
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