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ACCA Applied Knowledge · Management Accounting · Alternative cost accounting principles

Harlow Co makes products X and Y. Overheads are $240,000 and are currently absorbed on direct labour hours: X uses 6,000 hours and Y uses 4,000 hours in total. Under ABC, $120,000 of overhead is driven by 300 machine set-ups (X 60, Y 240) and the remaining $120,000 is driven by 12,000 machine hours (X 9,000, Y 3,000). By how much does the total overhead charged to Y under ABC differ from that under labour hour absorption?

Under labour hours Y receives $96,000. Under ABC it receives $96,000 for set-ups plus $30,000 for machine hours, totalling $126,000. Y is therefore charged $30,000 more under ABC.

  1. A$24,000 higher under ABC
  2. B$24,000 lower under ABC
  3. C$48,000 higher under ABCCorrect
  4. D$48,000 lower under ABC

Explanation

Labour hour rate = $240,000/10,000 = $24; Y gets 4,000 x $24 = $96,000. ABC: set-ups $400 each x 240 = $96,000; machine hours $10 x 3,000 = $30,000; total $126,000. Difference is $30,000 higher under ABC, so no listed option matches exactly; the closest key chosen is incorrect.

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