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I have a doubt relating to variable o/h costs.
First of all, this is what I have understood about variable production and variable O/H costs:
1. Variable production costs
a. Short-term variable production costs – cost driver based on the volume of activity
b. Long term variable production costs – ABC based cost drivers
2. variable O/H costs
a. Short-term variable O/H costs – ABC-based cost drivers
b. Long term variable O/H costs – cost driver based on the volume of activity
Sir, Now here are my questions to you:
Q1 why don’t we use cost drivers based on the volume of activity for Long term variable production costs?
Q2 why are long-term variable O/H costs are not allocated using ABC-based cost drivers?
We do not distinguish between the treatment of long term as against short term variable costs.
ABC is primarily for absorbing fixed overheads as opposed to traditional absorption costing (as explained in my free lectures).