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Activity Based Costing (Absorption Rate)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Activity Based Costing (Absorption Rate)

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.
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  • October 9, 2016 at 2:38 pm #342793
    mjibola
    Participant
    • Topics: 131
    • Replies: 135
    • ☆☆☆

    1. When calculating the absorption rates in ABC, is it correct to use EITHER of direct labour hours or machine hours to determine the activity level. Does this apply to cost drivers too?

    2. If short run variable costs are incurred as part of overhead costs, why is it wrong to use the production runs in determining the absorption rate?

    (BPP Study Text for F5, page 23 for reference please).

    October 10, 2016 at 9:27 am #342856
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54708
    • ☆☆☆☆☆

    You need to watch my free lectures on activity based costing, because it does seem that you are very confused!!

    We absorb each type of overhead based on what is causing the overhead (i.e. the cost driver). For some of the overheads, the driver may be labour hours, for others it may be machine hours. More commonly there are other drivers such as production runs.
    The cost drivers are always made clear in the question.

    Again, I do suggest you watch the free lectures. They are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.

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