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Which of the following statements about activity based costing are true?
A The cost driver for quality inspection is likely to be batch size.
B The cost driver for materials handling and despatch costs is likely to be the number of orders handled.
C In the short run, all the overhead costs for an activity vary with the amount of the cost driver for the activity.
D A cost driver is an activity based cost.You have not said which answer you think is incorrect, and why you think it is inconsistent with the Study Text.
The correct answer is B and the printed answer in your Revision Kit explains why.
On BPP study text, page number 26
Type of cost (inspection)
Cost Driver (Batches Produces)On BPP study text, page number 22
Materials handling (Number of production runs)
Despatching costs (Number of orders despatched)Answer should be A
No, the answer certainly should not be A.
Your quote from the BPP Study Texts suggests that the cost driver for inspections should be the number of batches produced.
Statement A in the question suggest that is should be the batch size. The size of the batch is not the same as the number of batches.
With regard to materials handling and despatch costs ,the number of orders handled is another way of saying the number of orders despatched. Materials handling is more uncertain because it depends on what materials they are referring to (which isn’t stated). However, production runs are only relevant if they produce their own goods.
Do appreciate that there are no rules regarding what cost drivers to use. It depends on the circumstances, That is why A and B both say ‘is likely’.
I do not have the Study Text, only the BPP Revision Kit. If you are watching my free lectures then you do not really need the Study Text. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well. It is the Revision Kit that is essential because question practice is so vital.
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