ABC

Coming to statement 1, ABC recognised that overheads costs are not all related to production volumes so some can be related to production volume for instance machine set up cost and machine running cost which are calculated by multiplying direct labor per unit with production volumes. The following statements have been made about ABC. Introducing ABC will always reduce costs in the short term if the cost of a product or service using both ABC and absorption costing is the same, there will be no benefit to be gained from adoption ABC the answer shows neither is correct but statement 2 is correct We know that, if the use of ABC is the same as the tradtional method of absortion costing then ABC use is extra cost and time Statement is incorrect because ABC is not variable cost it is usually based on fixed costs which can be reduced only in the long term

First question: Both statements are correct. Second question: Neither statement is correct. As I explain in my free lectures the main benefit of ABC is that identifying what causes the overheads can lead to more efficient operation and therefore a reduction in total overheads. If there is no reduction in total overheads then there is no benefit.

The statement two mentions the cost of product using both method will be the same and there is not reduction and therefore no benefit is gained. If there is no reduction then why it is not considered as benefit?if there is no reduction it is still extra time and cost using ABC. ABC benefit is acceptable when traditional absorption costing method exceeds ABC but this is obviously considered beneficial using ABC Understood Dear Tutor.

You are welcome :-)