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BPP revision kit – Q5 5.10 on Absorbtion costing

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › BPP revision kit – Q5 5.10 on Absorbtion costing

  • This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • November 17, 2015 at 11:57 am #283299
    Aswini Nadarajah
    Member
    • Topics: 7
    • Replies: 4
    • ☆

    Hi,

    Coud u kindly explain to me in more detail as to why statement 2 is incorrect please?

    Thank you

    Ash

    November 17, 2015 at 2:30 pm #283382
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    Although it won’t automatically be the case, it is actually the other way round. Absorption costing tends to allocate too few overheads to low volume products.

    Here is a very simple example to explain what I mean:

    Suppose we make 100 units of A and 1,000 units of B.

    Using absorption costing (it is on a per unit bases) would absorb the same amount per unit. Therefore in total B would be given 10 times as much overheads as A.

    However, it could be that the overheads all related to setting up the machines for production and that they only need to set up the machines once for each product (regardless of how many they produce). Therefore using ABC an equal amount of overheads (in total) should be given to each product.

    As a result using absorption costing is giving much lower overheads in total than if we used ABC.

    (Again, this is only a very simple example to try and illustrate the point, and it will not necessarily always be the case, but for that sort of reason absorption will tend to end up giving lower overheads to low volume products than ABC.)

    November 21, 2015 at 8:47 am #284279
    Aswini Nadarajah
    Member
    • Topics: 7
    • Replies: 4
    • ☆

    Thanks John.

    I would also like to clarify q 31 in BPP revision kit. With regards to contribution per unit could you explain how they calculated the no of metre squared of material M1 used for each product/component please?

    November 21, 2015 at 9:02 am #284287
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    I will answer you, but in future you must start a new thread when it is a new topic.

    Below the table it says that the cost of M1 is $20 per sq m.

    So since product P4 costs $15 per unit for M1 material it must mean that they are using 15/20 = 0.75 sq m’s per unit

    Similarly for P6 they must be using 10/20 = 0.5 sq m’s per unit.

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