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ACCA Applied Skills · Performance Management · Accounting for environmental and sustainability factors

A company currently absorbs all environmental compliance costs into general overheads on a labour hour basis. Management plans to trace them to products using activity-based costing. Which is the most likely effect?

Products that cause more environmental activity will show higher costs and low-impact products lower ones. ABC traces environmental costs using cost drivers rather than labour hours, so it changes how costs are shared between products, not the total cost incurred.

  1. AProducts that cause more environmental activity will show higher costs and low-impact products will show lower costsCorrect
  2. BAll products will show identical unit costs
  3. CTotal environmental costs incurred by the company will fall automatically
  4. DOnly products with high labour hours will bear environmental costs

Explanation

ABC assigns costs using drivers that reflect what causes them, so products generating more waste or emissions bear more cost, while low-impact products bear less. It changes the allocation of costs, not the total incurred. Total costs do not fall automatically, so that option is wrong.

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