In a marginal costing system only variable costs would be assigned to products or services, in which case management may rely on

a- contribution approach to decisions.

Required:

(a) Explain and discuss the contribution approach to decisions giving brief examples and drawing attention to any limitations. (6 marks)

A full absorption costing system would involve the assignment of both variable and fixed overhead costs to products. A traditional full absorption costing system typically uses a single volume related allocation base (or cost driver) to assign overheads to products. An activity based costing

(ABC) system would use multiple allocation bases or (cost drivers), taking account of different categories of activities and related overhead costs such as unit, batch, product sustaining and_ facility sustaining.

Required:

(b) Describe the likely stages involved in the design and operatioin of an ABC system.

(c) Explain and discuss volume related allocation bases (or cost drivers), giving an example of one within a traditional costing system.

Contrast this with the multipole allocation bases (or cost drivers) of an ABC system.

(6 marks)

(d) Briefly elaborate on the different categories of activities and related overhead costs, such as unit, batch, product sustaining and_ facility sustaining, which may be used in an ABC system. (4 marks)

(Total 20 marks)

ACCA Paper 8 Managerial Finance