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Hello tutor,
In my textbook there is one line about ABC costing “Remember that all costs are variable long-term because an organisation can change what it does. So if an organisation can avoid some activity that causes fixed costs, it will be able to reduce its fixed cost base in the longer term, becoming more competitive.”
and
“ABC is effective when overheads form a large proportion of the cost base.”
and
“For service industries with high fixed costs as a proportion of total costs, the activity-based method of absorption costing is likely to add significantly to the quality of decisions made, especially regarding pricing and product profitability.”
But I do not really understand these lines, can you please help me?
Thank you!
Your textbook is saying far more than is needed for Paper MA. Activity based costing is examined in detail in Paper PM and for Paper PM what your textbook says is important. However for Paper MA all that is required is just an awareness of the approach and our notes and lectures on ‘Alternative cost accounting’ explain everything needed in respect of this for Paper MA (and explain most of what is stated in your textbook as well :-). )
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