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Could you please explain the following theory content relating to ABC
Activity costs that relate to production volume, such as power costs, should be traced to products using production volume-related cost drivers, such as direct labour hours or direct machine hours worked.
Overheads which do not relate to production volume but to some other activity should be traced to products using transaction-based cost drivers, such as number of production runs and number of orders received.It is just a rather pompous way of saying what I explain in my free lectures – that each overhead should be absorbed according to what is causing the overhead to be incurred.
So, for example, machine related overheads would be absorbed on the basis of the machine hours worked, whereas, for example, the overheads relating to the setting up of machines should be absorbed on the basis of the number of machine set-ups.
I give examples of both in my free lectures.You would not be expected to write it this way in the exam 🙂
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