1.3 Activity Based Costing

Question 1

Process of ABC

Answer 1

OH Activities are identified
TC for each OH is evaluated
Cost driver OH is decided e.g Payroll- Per staff member
Costs then allocate to activity areas using basis
Assign OH to products to arrive at total OH per product
Add direct costs to get product cost per unit

Question 2

Absorption costing vs ABC suitibility

Answer 2

Absorption 
Simplistic ok where
- low levels of competition 
- fairly standardised product range
- Low proportion of non-volume-related indirect costs

Sophisticated ABC system suitable where

• intensive competition
• diverse range of products
• high proportion of non volume related products

Question 3

ABC practicality

Answer 3

• More useful cost information for decision-making purposes
• Provides purpose for improving efficiencies( reduce cost driver price)
• provides more accurate product and customer profitability

Question 4

Issues of ABC

Answer 4

Poor ABC model Design due to complexity

Potential resistance to change

Question 5

Downsides of ABC

Answer 5

Little evidence it increases profitability
Practical problems (cost driver selection)
Time consuming
May be more expensive to implement initially
Based on historic data that may be out date