Comparison of ABC with traditional product costing

(a) In the context of activity-based costing

(ABC), it was stated in Management Accounting—

Evolution not Revolution by Bromwich and Bhimani, that “Cost drivers attempt to link costs to the scope of output rather than the scale of output thereby generating less arbitrary product costs for decision making.’ You are required to explain the terms ‘activitybased costing’ and ‘cost drivers’.

(13 marks)

(b) XYZ ple manufactures four products, namely A, B, C and D, using the same plant and processes. The following information relates to a production period:

Total production overhead recorded by the cost accounting system is analysed under the following headings:

You are required:
(i) to compute an overhead cost per product using activity-based costing, tracing overheads to production units by means of cost drivers.

(ii) to comment briefly on the differences disclosed between overheads traced by the present system and those traced by activitybased costing.

Transcribed Image Text:

Material Direct Machine Labour cost labour cost Product Volume per unit per unit time per unit per unit ABCD 500 5 5000 5 1212 hour hour 3 hour hour 3 600 16 2 hours 1 hour 12 7000 17 1 hours hours 9