Comparison of ABC with traditional product costing (a) In the context of activity-based costing (ABC), it was
Question:
Comparison of ABC with traditional product costing
(a) In the context of activity-based costing (ABC), it was stated in Management Account- ing-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 arbi- trary product costs for decision making.' You are required to explain the terms 'activity- based costing' and 'cost drivers'. (13 marks)
(b) XYZ plc 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: Factory overhead applicable to machine-oriented activity is 37424 Set-up costs are 4355 The cost of ordering materials is 1920 Handling materials - 7580 Administration for spare parts - 8600. These overhead costs are absorbed by products on a machine hour rate of 4.80 per hour, giving an overhead cost per product of: A=1.20 B 1.20 C=4.80 D= 7.20 However, investigation into the production over- head activities for the period reveals the following totals:
You are required: (i) to compute an overhead cost per product using activity-based costing, tracing over-
heads to production units by means of cost drivers. (6 marks) (ii) to comment briefly on the differences disclosed between overheads traced by the present system and those traced by activity- based costing. (6 marks) (Total 25 marks)
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