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Hello! I was solving a question in the BPP kit:
ABC is felt to give a more useful product cost than classic absorption costing (with overheads absorbed on labour hours) if which of the following TWO apply?
– Labour costs are a relatively minor proportion of total costs
-Overheads vary with many different measures of activity
-Overheads are difficult to predict
-Cost drivers are difficult to identifyI don’t understand as to why is ABC felt to give a more useful product cost than classic absorption costing (with overheads absorbed on labour hours) if labour costs are a relatively minor proportion of total costs? Please let me know. Thank you!
ABC is felt to give a more useful product cost than classic absorption costing (with overheads absorbed on labour hours) It maybe that labour costs are a relatively minor proportion of their total costs. So the traditional absorption costing method, which allocates overheads based on labour hours, may not accurately reflect the actual consumption of overhead resources by different products or activities.
ABC, on the other hand, identifies the major activities that give rise to overheads and determines the cost driver for each activity. By allocating overheads based on the specific cost drivers, ABC provides a more accurate and meaningful allocation of overhead costs, leading to more useful product costs.
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