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ACCA Applied Knowledge · Management Accounting · Alternative cost accounting principles

Karo Co absorbs overheads on direct labour hours. Its budgeted overhead is $300,000 and budgeted labour hours are 50,000. Under ABC, product Q is allocated $45,000 of overhead for 5,000 units. Q uses 2 labour hours per unit. By how much does the overhead cost per unit of Q under ABC differ from the traditional cost per unit?

ABC gives a cost per unit that is $3 lower than the traditional method. Traditional absorption uses $6 per labour hour, so 2 hours cost $12 per unit. ABC allocates $45,000 across 5,000 units, which is $9 per unit.

  1. AABC is $3 per unit lower
  2. BABC is $3 per unit higherCorrect
  3. CABC is $9 per unit higher
  4. DABC is $12 per unit lower

Explanation

Traditional rate = $300,000/50,000 = $6 per hour; per unit = 2 x $6 = $12. ABC per unit = $45,000/5,000 = $9. ABC is $3 lower, not higher. Therefore the correct comparison is ABC $3 lower.

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