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ACCA Applied Skills · Performance Management · Activity-based costing

Which of the following is a recognised criticism of traditional volume-based absorption costing?

Traditional absorption costing assumes overheads vary with volume, such as labour or machine hours. Because complex, low-volume products consume more support activities than volume suggests, they are undercosted while high-volume products are overcosted.

  1. AIt assumes overheads are driven by production volume, so low-volume complex products are often undercostedCorrect
  2. BIt requires cost drivers to be identified for every activity
  3. CIt treats all overheads as variable costs
  4. DIt ignores direct materials when costing products

Explanation

Traditional absorption assumes overhead varies with volume measures such as labour hours, so low-volume, complex products that use more support activities are undercosted. Identifying many cost drivers is a feature of ABC, not traditional costing. Direct materials are included.

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