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ACCA Applied Skills · Performance Management · Activity-based costing

Kora Co absorbs overheads using machine hours. Product X uses 2 machine hours per unit and Product Y uses 1 hour per unit. The overhead rate is $10 per machine hour, so X is costed at $20 and Y at $10 overhead per unit. An ABC review finds that Y, a low-volume product, causes most of the order-handling and set-up costs, giving it an ABC overhead of $25 per unit and X $12 per unit. What is the likely effect on pricing decisions if Kora prices at cost plus 40% using the traditional cost?

X is overpriced and Y underpriced. Traditional costing charges X $20 against an ABC figure of $12, but charges Y only $10 against $25, so cost-plus pricing inflates X's price and leaves Y priced below its true cost.

  1. AX is underpriced and Y is overpriced relative to ABC cost
  2. BX is overpriced and Y is underpriced relative to ABC costCorrect
  3. CBoth products are correctly priced
  4. DBoth products are overpriced relative to ABC cost

Explanation

Traditional overhead for X ($20) exceeds its ABC overhead ($12), so X is overcosted and its price is inflated. Y's traditional overhead ($10) is below ABC ($25), so Y is undercosted and underpriced. The first option reverses this.

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