ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting
Kestrel Components makes precision parts. Its management accountant allocates overheads using a single rate per machine hour. Product A, a high-volume item, appears highly profitable, while Product B, a low-volume customised item that requires many set-ups, inspections and engineering changes, appears marginally profitable. The board suspects that the costing method is distorting product profitability. Which technique would most directly address this concern?
Activity-based costing is the best fit because it traces overheads using cost drivers like set-ups and inspections. This reveals that the low-volume customised product consumes far more support activity than a single machine-hour rate shows, correcting the distorted product profitability.
- AActivity-based costing, tracing overheads to products using cost drivers such as set-ups and inspectionsCorrect
- BIncremental budgeting, rolling forward last year's overheads with an inflation uplift
- CAbsorption costing using a single plant-wide direct labour hour rate
- DStandard costing with monthly price and usage variance reporting
Explanation
Activity-based costing assigns overheads to cost pools and traces them to products via drivers such as the number of set-ups. Low-volume, complex products consume disproportionate support activity, which a single machine-hour rate hides. The other options do not change how overhead is attributed to products.
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