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ACCA Applied Knowledge · Management Accounting · Alternative cost accounting principles

Which of the following is most likely to make ABC more suitable than traditional absorption costing for an organisation?

ABC is most suitable when overheads are large and products consume support activities such as set-ups and inspections in very different proportions. Volume-based absorption would then distort product costs, whereas ABC traces costs to the activities that cause them.

  1. AOverheads are a small proportion of total costs and products consume resources in similar proportions
  2. BThe organisation makes a single product in a single process
  3. COverheads are large and products differ widely in their use of support activities such as set-ups and inspectionsCorrect
  4. DCosts are mostly direct materials that vary with output

Explanation

ABC adds most value where overheads are significant and products consume activities in different proportions, since volume-based absorption then distorts product costs. The other situations involve low overheads, single products or direct costs, where ABC gives little extra accuracy for its added cost.

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