AMA Q22 - Chapter 9

Question 1

What is ABC?

Answer 1

Activity-Based Costing

Question 2

What differentiates ABC?

Answer 2

It factors the reason why overheads are incurred and leads to better analysis of overheads’ impact on profit

Question 3

Outline the steps of ABC

Answer 3

1. Match overhead costs to specific activity (could be numerous activities within one company)
2. Identity drivers which cause each specific activity to change. Calculate total quantity of these drivers.
3. Calculate the OAR for the cost pool and divide by the number of drivers (OAR per unit/quantity of cost driver)
4. calculate cost per unit (OAR per unit of cost driver X total usage of cost driver per product)
5. total activity cost per unit / No of units

Question 4

Cost Pool definition

Answer 4

all the various overheads that can be shared within one activity

Question 5

Cost Driver

Answer 5

A factor that causes the level of an activity to change

Question 6

Which type of cost is OAR concerned with?

Answer 6

Fixed Costs

Question 7

How do you calculate an OAR if it is by labour-hours?

Answer 7

total fixed cost / number of hours required

Question 8

Outline benefits of ABC

Answer 8

• Improved decision-making: more detail to costs
• Better oversight of costs
• Improved pricing: the profit of each product line is more accurately shown, allowing competitive pricing
• Complexity of overheads: complex overheads are more accurately shown how they impact costs by cost driver

Question 9

Outline disadvantages of ABC

Answer 9

• Time and cost: takes time to setup system of ABC
• Standardised products: Little benefit to businesses which have simple products of little diversity in how they are made
• Complex cost drivers: sometimes it is too complex to ascertain the relationship between a cost driver and an overhead

Question 10

When should ABC be used?

Answer 10

1. When the overhead to direct cost ratio is high
2. When there is diversity in the product range
3. when there is significant variety in the consumption of overheads by each product
4. When consumption of resources is not driven by volume of product produced