Advanced: Comparison of ABC with traditional produ ct co stin g

(a) In the context of activity based costing (ABC), it was stated in Management Accounting - Evolution not Revolution by Bromwich and 8himam, 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 'activity based costing ' and 'cost drivers'. (13 marks)

(b) XVZ pic manufactures four products , nameiy A, 8, 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 machtne·oriented activity is £37 424 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:

However, investigation into the production overhead activities for the period reveals the following totals:

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. (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)
(Total25 ma1rks)
CIMA Stage 4 Management Accounting - Control and Audit

Transcribed Image Text:

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