Skip to content

ACCA Applied Skills · Performance Management · Activity-based costing

Compared with a traditional absorption costing system that uses a single direct labour hour rate, what is the usual effect of switching to activity-based costing on the reported unit cost of a low-volume, complex product that needs many setups and inspections?

The reported unit cost usually rises. Traditional single-rate absorption spreads setup and inspection costs over all volume, under-costing low-volume complex products. ABC traces those costs to the products that cause them, so total overhead stays the same but more is assigned to the complex product.

  1. AThe reported unit cost usually risesCorrect
  2. BThe reported unit cost usually falls
  3. CThe reported unit cost is unchanged because total overheads are unchanged
  4. DThe reported unit cost falls because fewer overheads are traced to it

Explanation

Traditional volume-based absorption spreads costs of setups and inspections across all units, so low-volume complex products are under-costed. ABC traces these costs to the products that cause them. Total overhead is unchanged, but its distribution between products changes, so the complex product's unit cost typically rises.

Did you get it right without looking?

One question tells you little. A timed set on Activity-based costing shows your real accuracy, how long you take and where you lose marks.

Practise Activity-based costingFree diagnostic mock

More Activity-based costing questions