Module 12 - Activity Based Costing

Question 1

Major principles of ABC

Answer 1

1. activities cause costs
2. producing products creates demands for the activities
3. costs are assigned based on products consumption of the activities

Question 2

outline of ABC system

Answer 2

1. identify major activities
2. identify cost drivers
3. calculate total activity levels
4. work out cost per cost driver
5. charge costs to products based on usage of activity

Question 3

Advantages of ABC

Answer 3

• meaningful production costs
• more accurate info
• more info on product or customer profitability
• results in better pricing decisions
• can look at variances
• overheads are charged to products on more equitable basis

Question 4

Disadvantages of ABC

Answer 4

• need to understand cost behaviour
• cost of exercise may outweigh benefits
• changing technique doesn’t alter total costs
• some overheads cannot be traced to products

Question 5

Favourable conditions for ABC

Answer 5

• when fixed production overheads are high compared to direct labour etc
• when there is a wide diversity of product range
• where there are considerable differences in use of resources by products
• when consumption of resources is not driven by volume