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CA Intermediate · Cost and Management Accounting · Activity Based Costing

Under ABC, which statement about the effect of a switch from traditional volume-based absorption is most likely correct for a company producing a high-volume standard product and a low-volume customised product?

The customised low-volume product usually shows a higher unit cost under ABC. It consumes more setups, design effort and handling per unit, which volume-based methods spread to high-volume products. ABC traces these costs to the activities consuming them, while total overhead remains unchanged.

  1. AThe customised product usually shows a higher unit cost under ABCCorrect
  2. BThe standard product usually shows a higher unit cost under ABC
  3. CTotal overhead cost of the company increases under ABC
  4. DUnit costs of both products always fall under ABC

Explanation

Low-volume customised products consume disproportionately many setups, design and handling activities, which volume-based absorption under-costs. ABC traces these to the product, raising its unit cost and lowering the standard product's cost. Total overhead stays the same; only its distribution changes.

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