Topic 5 - Activity Based Costing

Question 1

Cost pools

Answer 1

Part of the business where activity takes place

Question 2

Cost driver

Answer 2

Factors that cause costs to change

Question 3

Cost rate formula

Answer 3

Cost pool/ Cost driver

Question 4

Cost rate

Answer 4

The rate at which the cost pool increases per cost driver

Question 5

Activity Based Costing

Answer 5

ABC is a development of absorption costing and also focuses on overheads and full cost recovery but is (arguably) more accurate as it focuses on cost drivers and avoids splitting overheads between cost centres on what is always going to be to some extent on arbitrary basis

Question 6

Advantages

Answer 6

Should give a more accurate full costs figure than absorption costing leading to a more accurate price
ABC captures the fact that the size of productio batches affect costs
Cost units are charged with overhead based on thier usuage of cost drivers

Question 7

Disadvantages

Answer 7

Cost pools can have multiple cost drivera whic makes ABC much more complex in realtity than the theory would suggest