Advanced: 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 pic 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 £37 424 Set-up costs are £4355

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.

Transcribed Image Text:

Material Direct Machine Labour cost labour time cost Product Volume per unit per unit per unit per unit ABCD 500 5 hour hour 3 5000 5 hour hour 3 4 600 16 2 hours 1 hour 12 7000 17 1 hours hours 9