University of London (LSE)

(UOL AC2097) Management Accounting

(2020 Academic Year)

Ms Joanna Chia

Session 6 & 7 Lecture Notes

Activity-based Costing (ABC)

Activity-based Management (ABM)

For SIM Students’ Use Only

Do not distribute or upload to websites or reproduce in any form.
Not to be reproduced for sale.

DEFECTS ARE INHERENT IN THE ORIGINAL COPY

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 SESSION 6 & 7

SESSION 6: ACTIVITY- BASED COSTING

6.0 Activity-based Costing (ABC) : Definition

‘Activity-based Costing (ABC) is a costing approach that assigns resource costs to cost
objects such as products, services, or customers based on activities performed for the
cost objects’ and it ‘is a costing approach that a firm’s products or services are the
results of activities and activities use resources which incur costs.’ (Blocher, Stout &
Cokins 2010, p.129) It is ‘a costing method that is designed to provide managers with
cost information for strategic and other decisions that potentially affect capacity and
therefore “fixed” as well as variable costs.’ and is adopted ‘by a wide variety of
organizations including CitiGroup, Coca-Cola, Fairchild Semiconductor, DBS Group,
Tata Group, and BHP Billiton.’ (Garrison et al 2012, p. 276).

6.1 Changes in the Business Environment & the need to Refine the Costing
System - ABC Systems

Alternative methods of costing have been developed to improve the accuracy of the
management accounting information. The need for a refined costing system that reduces
the broad averages for assignment the cost of resources to cost objects such as
products, services, jobs, customers, etc) are required today due to increased indirect
costs due to technological advancements such as the computer-integrated
manufacturing and flexible manufacturing systems, a highly competitive environment and
increase in product diversity. (Horngren et al 2015) It led to changes in the way the
business operates.

What are the major changes in the environment of today?

The major changes are:

- A shift from labour based to machine based production.
- A shift from low level to high level overhead (indirect) costs.
- One or two cost drivers to multiple cost drivers
- A shift from a few products/services to many products/services
- A shift from manual and simple processes to high technological processes
- A shift from a relatively uncompetitive market to a global competitive market.

It affected the way goods are manufactured, services delivered, how companies
compete, etc. The implication is that the appropriate and correct allocation of overhead is
crucial to a firm’s decision-making process related to product/service costs.

Traditional overhead allocation applied a predetermined overhead rate established and

applied to products or services applying an allocation basis eg output, machine hours,
labour hours, direct material costs, direct labour hour cost and prime costs to the
products, are no longer reliable.

There is a need to refine the costing system and it requires increased direct cost tracing,
increased numbers of indirect cost pools and cost drivers and the relevant cost-allocation
bases.

Activity based costing (ABC) is one such development. The concept of ABC developed
by H T Johnson and R S Kaplan in the 1980s, emerged as a useful tool for producing

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more reliable product or service cost information. It views an organisation as an
interrelated set of activities and translate that activity view to costs

‘In an ABC system, the cost of a product is the sum of the costs of all activities required
to manufacture and deliver the product…. Many of these activities are unrelated to the
volume of production runs. Eg doubling volume does not require doubling the number of
set-ups or part orders. A simple volume-related allocation base cannot capture the
complexity of the relationship between volume and lot or order size.’ Cooper (1988)
The major ideas behind activity based costing are as follows:

a. Activities cause costs. Activities include ordering, materials handling, machining,

assembly, production scheduling and dispatching.
b. Products create demand for the activities.
c. Costs are assigned to products on the basis of a product's consumption of the
activities.

Activity based costing uses a number of different cost drivers to absorb different
overheads. whereas traditional absorption costing only uses one, for example: Labour
hours, machine hours or per unit.

In activity-based costing, fixed overhead costs may include machine set-up costs. These
costs will not be incurred on a per unit basis but will be incurred each time the machine
has to be set-up. It would not, therefore, be sensible to allocate costs per unit since that
is not how the cost is incurred. It is, however, better to use the number of set-ups for this
particular cost to allocate costs to units.

6.2 ‘Overhead Creep’

Newton (2007) describes the overhead creep as “the increase in overheads that is
gradual, unintended and almost whimsical inflation of overhead that sneaks up on all of
us – in our personal and business lives.”

As more production support such as more engineers hired, more specialised machinery
purchased with the resulting depreciation charges for the factory. “The increase in
production overheads has been steady and somewhat invisible, with no ‘big events’ on
which one could lay one’s finger” (Ahrens 2005, p. 72)

6.3 Absorption Costing

Absorption costing appears to be relatively straightforward way of adding overhead costs

to units of production using, more often than not, a volume related absorption basis
(such as direct labour hours or direct machine hours or a constant percentage of
overheads costs).

The assumption that all overheads are related primarily to production volume is implied
in this system. The traditional cost systems using absorption costing was developed in a
time when most organizations produced only a narrow range of products and when
indirect or overhead costs were only a very small fraction of total costs, direct labour and
direct material costs accounting for the largest proportion of the costs. Errors made in
allocating overheads to products were then not too significant.

Nowadays, with the advent of advanced manufacturing technology, overheads are likely
to be far more important and in fact, direct labour may account for as little as 5% of a
product's cost. Moreover, there has been an increase in the costs of service support
functions, such as setting-up, production scheduling, inspection and data processing,

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which assist in the manufacture of a wide range of products. Overheads cost have also
changed to focus on customer or quality. These overheads are not, in general, affected
by changes in production volume. They tend to vary in the long term according to the
range of complexity of the products manufactured rather than the volume of output.

6.3.1 Undercosting, Overcosting and Product Cost Cross-Subsidization

One Cost Pool: Peanut-butter Costing May Cause:

• Undercosting
• High use of resources but low total cost
• Overcosting
• Low use of resources but high total cost
• Cross-subsidization
• High resource use product gets low cost and other products get higher cost

Peanut butter costing is a costing approach that uses broad averages for assignment the
cost of resources uniformly to cost objects, for eg. products or services, when the
individual products or services may not use those resources uniformly. (Horngren et al
2015, p. 173)

Absorption costing tends to allocate too great a proportion of overheads to high volume
products (which cause little diversity), and too small a proportion of overheads to low
volume products (which cause greater diversity and therefore use more support
services), undercosting may result in company selling products which are in fact losing
money but erroneously believe them to be profitable while overcosting may result as a
company erroneously believes products are low-margin or even unprofitable and
competitors may enter the market and take away the market share of the products.
Cross-subsidization results when under or over-costed product results in at least one
other product being over or under-costed.

6.4 Warning Signs That Suggest That ABC Could help a Firm:

(i) Products that a company is well suited to make and sell show small profits,
whereas those less suited show large profits.
(ii) Complex products appear to be very profitable and simple products appear to be
losing money.
(iii) When significant amounts of indirect costs are allocated using one or two cost
pools.
(iv) All or most indirect costs are identified as output unit level costs (ie few indirect
costs are described as batch level, product sustaining or facility sustaining costs.
(v) Products make diverse demands on resources because of differences in volume,
process steps, batch size or complexity.
(vi) Operations staffs have significant disagreements with the accounting staff about
the costs of manufacturing and marketing products and services.
(vii) When expected benefits exceed expected costs.

According to Drury (2015), a sophisticated cost system such as the ABC system may be
optimal if the organisation has some of the following characteristics:
1. Intense competition
2. Non -volume related indirect costs that are a high proportion of total indirect costs
3. Diverse range of products or services consuming resources of significantly
different proportions due to high product diversity (Drury 2015, p. 272)

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6.5 Cost versus Benefits Consideration

The main consideration on the cost system design is that benefits should outweigh
costs. The ABC system is an expensive system, however, it provides more reliable
information with a greater degree of accuracy than the direct costing or traditional
costing system.

There are instances where the traditional cost system may be adequate and provide a
reasonably accurate product or service cost information for example:
1. They produced only a few products or services.
2. There are low levels of competition
3. Non -volume related indirect costs that are a low proportion of total indirect costs
4. A fairly standardized product range that consumes resources in similar proportions
(ie low product diversity) (Drury 2015, p. 272)

6.6 Cost Hierarchies

Horngren et al (2015, p. 183) defines a cost hierarchy as one that categorises costs into
different cost pools on the basis of the different types of cost drivers (or cost allocation
bases) or different degrees of difficulty in determining cause and effect (or benefits
received) relationships.

Cooper (1990) identified four level of activities or costs:

(1) Unit level activities and costs
(2) Batch level activities and costs
(3) Product level activities and costs
(4) Facility sustaining costs

6.6.1 Unit level activities and costs

Output unit-level costs are the ‘costs of activities performed on each individual unit of a
product or service’ (Horngren et al 2015, p. 183). It is the costs of activities performed
each time a unit of product is produced or a service is provided.
Eg direct product costs as in traditional costing system such as costs relating to direct
material and direct labour and identifiable on a unit basis. Other examples are: machine
operations costs allocated to products based on machine hours, etc. (Horngren et al
2015).

6.6.2 Batch level activities and costs

Batch-level costs are costs of activities performed each time a group of units or batch of
goods or services is produced or provided, rather than each individual unit of product or
service. It changes for example, when the number of batches changes
Eg Set-up activities or costs prior to the production run. The cost of the set up activity is
independent of the volume of units to be produced in the batch and is based on setup-
hours, batches or number of production runs. Other examples are: material handling,
quality inspection associated with batches and not quantities, purchasing orders’ costs
based on number of purchase orders instead of the materials quantity or value.
(Horngren et al 2015, p. 183)

6.6.3 Product level activities and costs

Product sustaining or service-sustaining costs are costs when activities are performed to
enable individual products to be produced or sold. It is possible to trace the cost of these

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activities to individual products, but they are not related to the number of units or batches
in which they are produced.
Eg product research and development, design, modifying and testing costs, costs of
making engineering changes, marketing costs to launch new products, etc. (Horngren et
al 2015)

6.6.4 Facility sustaining costs

Activities or costs essential to the operation of the plant or facility.

Many of these costs are administrative in nature and might include security, lighting,
personnel and plant management, and accounting at shop floor. They are not traced to
the products or services but do support the organisation as a whole.
Eg. General administration costs.

6.7 Outline of an ABC system

An ABC costing system operates as follows:

Step 1.

Identify an organization's major activities.

It involves an analysis of organisational activities
Eg of a Manufacturing firm
• Design products and processes
• Set up machines
• Operate machines
• Maintainance and cleaning after manufacturing
• Storage of finished goods
• Distribution to customers
• Administration and management

Step 2.

Identify the factors, which determine the size of the costs of an activity / cause the costs
of an activity. These are known as cost drivers. Look at the following examples.

Activity Cost driver

Ordering Number of orders
Materials handling Number of production runs
Production scheduling Number of production runs
Dispatching Number of dispatches

For those costs that vary with production levels in the short term, ABC uses volume-
related cost drivers such as labour or machine hours. The cost of oil used as lubricant on
the machines would therefore be added to products on the basis of the number of
machine hours since oil would have to be used for each hour the machine ran.

Step 3.

Collect the costs of each activity into what are known as cost pools (equivalent to cost
centres under traditional costing methods).

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Step 4.

Charge support overheads to products on the basis of their usage of the activity. A
product's usage of an activity is measured by the number of the activity's cost driver it
generates.

Suppose, for example, that the cost pool for the ordering activity totalled $100,000 and
there were 10,000 orders (the cost driver). Each product would therefore be charged with
$10 for each order it required. A batch requiring five orders would therefore be charged
with $50.

Absorption costing and ABC are similar in many respects. In both systems, direct costs
go straight to the product and overheads are allocated to production cost centres/cost
pools. The difference lies in the manner in which overheads are absorbed into products.
Absorption costing uses usually two absorption bases (labour hours and/or machine
hours) to charge overheads to products whereas ABC uses many cost drivers as
absorption bases (number of orders, number of dispatches and so on). Absorption rates
under ABC should therefore be more closely linked to the causes of overhead costs and
hence produce more realistic product costs, especially where support overheads are
high.

6.8 Cost Drivers

The principal idea of ABC is to focus attention on what causes costs to increase, the cost
drivers. Just as there are no rules for what to use as the basis for absorbing costs in
absorption costing, there are also difficulties in choosing cost drivers.
Those costs that do vary with production volume, such as power costs, should be traced
to products using production volume-related cost drivers as appropriate such as direct
labour hours or direct machine hours.

Overheads do not vary with output but with some other activity should be traced to
products using transactions based cost drivers such as number of production runs and
number of orders received.

Focusing attention on what actually causes overheads and tracing overheads to

products on the basis of the usage of the cost drivers ensures that a greater proportion
of overheads are product related, whereas traditional costing systems allow overheads
to be related to products in only the most arbitrary of ways. It is this feature of ABC,
which produces, it is claimed greater accuracy. It attempts to show relationship between
overhead costs and activities that drive them, i.e. the cost drivers.

6.9 Example:

1: Consumption patterns By Product

Assume that Traditional Ltd manufactures four products A, B, C and D. The overheads
are allocated based direct labour hours under the traditional absorption costing system.

The input, output and cost figures for May 20X1 are as follows:

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 Per unit
Products

No. Of No. Of
Output No. Of
Material Direct Labour Machine Purchase Quality
in Units Set-ups
Cost($) Hours Hours Orders Checks
( at $4/hour)
A 10 40 3 3 2 40 5
B 10 160 15 15 5 100 15
C 100 40 3 3 1 50 5
D 100 160 15 15 4 100 15

2. Breakdown of Overheads

Overhead Costs Comprises $

Machining costs 19,800
Set-up costs 14,400
Purchasing costs 11,600
Quality assurance costs 13,600
Total 59,400

3. Traditional Product Costing

The overhead applied rate is : Budgeted overheads / cost allocation base (labour hours)
=
=

Using the traditional absorption costing technique, the product costs will be:

A($) B($) C($) D($) Total($)

Direct materials
Direct labour
Overheads applied

Units produced
Cost per unit($)

4. Activity-based Costing

Assume that the cost drivers for the overheads are:

Machining costs Machine hours

Set-up costs No. of set-ups
Purchasing costs No. of purchase orders
Quality assurance costs No. of quality control checks

The following cost driver rates can be derived:

Activities Activity
Cost Pools Cost Drivers Cost Rates
/Overheads
Machining
Set-ups
Purchasing
Quality assurance

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Using ABC techniques, the product costs will be:

A($) B($) C($) D($) Total($)

Direct materials
Direct labour
Overheads applied:
Machining costs
Set-up
Purchasing
Quality assurance
Total
Units produced
Cost per unit($)

5. Comparison of Product Cost Using the Traditional Costing System and the ABC
System

Product Cost Per Unit

Units ABC Difference:
Product Traditional System($)
Produced System($) (under)/over-costed
A
B
C
D

Remarks:

• Under the traditional system, the low-volume products, A and B, reflect a lower cost.
• The traditional system overcosts the high-volume products, C and D.
• In other words, C and D are subsidizing low-volume products, A and B.

6.10 Advantages and Disadvantages of using ABC

6.10.1 Advantages of using ABC

1. More accurate picture of product cost.

2. Enable more strategic decisions to be made, e.g. dropping of unprofitable product

lines, raising prices, etc..

3. Raises company’s awareness in product design decisions (e.g. costs of using extra
component parts is more accurately reflected).

4. Focus will be on where the activities and hence costs are incurred and to enable
more relevant cost-benefit analyses to be carried out e.g. set-ups.

5. Provision of more detailed information

6. Better understanding of resource use

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7. Closer relationship between demand for resources and overhead charged

8. Better information for pricing decisions and resource use decisions

9. Better information for budgeting

6.10.2 Limitations of ABC

1. Identification of cost drivers is very time consuming. Not all cost pools can be
matched to an appropriate cost driver. The selection of cost driver is not at all easy.
For example, for material handling: machine hours, labour hours or even store orders
can be used.

2. Traditional costing is still needed in financial accounting for inventory evaluation.

ABC can only be considered as a one-off strategic tool for decision making. For
an example, to value direct material cost.

3. ABC could only be an extension to traditional methods, which could have already
used more than one absorption rate. In this example, direct labour hour and machine
hour.

4. ABC needs a team of dedicated accounting professionals who can implement and
manage. There is an always a trade-off between accuracy and system
manageability.

5. Certain costs have no direct link to the product provided. Example, material handling.
The key driver for this cost pool may be clear but difficult to identify with each
product. For an example, how do we establish number of store orders for Product A?
How accurate is it? Sometimes, we would have the same store orders for many
number of products including this product.

6. ABC is based on past measure. It becomes difficult to use for future where
predictions of expected cash flows become important. Just because a casual
relationship is identified, does not mean cost pool will increase proportionately to the
cost driver in an uncertain environment.

7. Costly to operate very detailed ABC systems

8. Requires many calculations to determine costs of products or services

9. Allocations necessary to calculate activity costs often result in activity cost pools and
quantities of cost allocation bases being measured wrongly and may be misleading

10. Activity cost rates need to be updated regularly

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 SESSION 7: ACTIVITY-BASED MANAGEMENT (ABM)

7.0 Activity-Based Management (ABM)

Activity-Based Management (ABM) is a management system which uses activity-based

costing information to improve profits and enhance value to customers’ (Bhimani et al
2019, p. 817).

ABM is the application of activity analysis to cost management, often in support of

continuous improvement in an organisation. The umbrella for a range of organisational
initiatives aimed at producing sustainable, enhanced performance.

It is a method of management that used ABC as an integral part in critical decision-

making situations, including:
• Pricing and product-mix decisions
• Cost reduction and process improvement decisions
• Design decisions
• Planning and managing activities

Activities and processes are underlying variables which cause costs to be incurred, so
the focus is on management of costs via the management of activities.

Using ABC for activity analysis for cost management purposes – management of cost
drivers, further examination of activities to allow classification as value adding or non-
value adding, cost management through a value-chain perspective and supporting
performance measurement systems.

7.1 Value Adding or Non-value Adding Activities and Costs

A value adding activity is an activity that if eliminated would reduce the product’s service
to the customer in the long run while a non-value adding activity is an activity which
presents the opportunity for cost reduction without reducing the product’s service
potential to the customer. (Atkinson et al. 1995)

Whether a particular activity is value adding or non-value-adding depends on the

organisation and its characteristics, and the contribution of that activity to the final
product’s service and functionality.

From the customer’s perspective, it is clear that he/she will be willing to pay for the value
adding activities and costs but not for non-value-adding activities.

7.2 Examples of Value and Non-Value Adding Activities:

7.2.1 Non-value-adding

Non-value-adding activities often exist due to poor process planning, poor or inefficient
plant layout, cumbersome administrative processes and the use of strategies which seek
to optimise rather than minimise.

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7.2.2 Value adding
• As required by value adding processes eg depreciation, machine operation
• As prevention eg preventive maintenance
• Non value adding:
• As appraisal eg inspection, supervision & management
• As failure
• As waste/unnecessary cost eg waiting, handling, overproduction
• This classification was used at each process level including both the
manufacturing and non-manufacturing stages.

7.3 Guidelines For Cost Reduction

Turney (1992) provides 5 guidelines for cost reduction by managing activities:

1) Reduce time and effort – through improving processes or product improvement.

Time = Costs and improved processes and product design provide distinct
opportunities for cost reduction.
2) Eliminate unnecessary activities reduces overall costs and the cost of the
products – those activities not valued by customers or non-essential to running
the operations. By re-designing, process re-engineering,etc.
3) Select low-cost activities. At product design phase, designers have choices
among competing activities. Cost reduction achieved when designers select the
lowest cost activity.
4) Share activities wherever possible.
5) Redeploy unused resources. Grow business to take up slack, redeploy the
resources to other activities or remove them.

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 SESSION 6 & 7 TUTORIAL QUESTIONS

Question 1

Janice Ltd is considering changing from traditional overhead absorption based on labour
hours to an Activity Based Costing (ABC) approach. Budgeted details for the three
products manufactured are as follows:

Product X Y Z

Output (Units) 240 200 160

Cost per unit S$ S$ S$

Direct Material 20 25 15
Direct Labour 14 10 7

Labour Hours per unit 8 6 4

The products are produced in production runs of 40 units and sold in batches of 20 units.
The production overhead for the period under review has been analysed as follows:
S$
Assembly department costs 20,860
Costs of setting up machines 10,500
Costs of raw material storage 7,200
Costs of quality control 4,200
Costs of handling materials 9,240

The management accountant has identified the following cost drivers:

Cost driver Cost

Production runs Setting up machines / quality control
Requisitions Raw material storage
Orders Handling materials

Volume of requisitions raised was 20 for each product and the quantity of orders carried
out was 30.

Required:
a) Calculate the unit production cost for each product if all overhead costs are
absorbed in traditional manner. [7 marks]

b) Calculate the unit production cost for each product using Activity Based Costing
[14 marks]

c) Explain briefly how Activity Based Costing overcomes distortions in product

costing which arise through conventional cost accounting. [4 marks]

Question 2

Quality Machining Products (QMP) is an automotive component supplier. QMP has been
approached by National Auto Makers with a proposal to significantly increase production
of Part P15C to a total annual quantity of 100,000. National Auto Makers believes that by
increasing the volume of production of Part P15C, QMP should realize the benefits of
economies of scale and hence should accept a lower price than the current $6.00 per
unit. Currently QMP’s gross margin on Part P15C is 3.3%, computed as follows:

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 Per
Total Unit
(÷ 100,000)
Direct Materials $150,000 $1.50
Direct labour 86,000 .86
Factory overhead (400% x direct labour) 344,000 3.44
Total cost $580,000 $5.80
Sale Price 6.00
Gross margin $ .20
Gross margin percentage 3.3%

Part P15C seems to be a marginal profit product. If additional volume of production of

Part P15Cis to be added, QMP management believes that the sales price must be
increased, not reduced as requested by National Auto Makers. The management of
QMP sees this quoting situation as an excellent opportunity to examine the effectiveness
of their traditional costing system versus an activity-based-costing system. The following
data have been collected by a team consisting of accounting and engineering analysts.

Activity Centre: Cost Drivers Annual Cost-Driver

Quantity
Quality: number of pieces scrapped 10,000
Production scheduling and setup: number of 500
setups
Shipping: number of containers shipped 60,000
Shipping administration: number of shipments 1,000
Production: number of machine hours 10,000

Activity Centre Traceable Factory Overhead Costs (Annual)

Quality $ 800,000
Production scheduling 50,000
Setup 600,000
Shipping 300,000
Shipping administration 50,000
Production 1,500,000

Total Cost $3,300,000

The accounting and engineering team has provided the following cost-driver
consumption for the production of 100,000 units of part P15C.

Cost Driver Cost-Driver Consumption

Pieces scrapped 1,000
Setups 12
Containers shipped 500
Shipments 100
Machine hours 500

(a) Prepare a schedule calculating the unit cost and gross margin of Part P15C using
the activity-based-costing approach. (15 marks)

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(b) Based on the ABC results, what course of action would you recommend
regarding the proposal by National Auto Makers? List the benefits and costs
associated with implementing an activity-based-costing system at QMP.
(10 marks) [1999/ Zone A/ Q2]

Question 3

Tasty Cakes Ltd, have made 0.5kg ginger cakes for some years. The manufacturing
direct costs are materials and labour. All other manufacturing costs are considered
indirect overhead which is allocated to products using a ‘units of production’ allocation
base. In 2002 a second product was added, a 0.5kg iced raisin cake. The company
continued to use the existing costing system where a unit of production of either cake
was charged with the same amount of indirect cost.

The estimated costs and sales volumes for 2002 were as follows:

Ginger cake Iced raisin cake

Direct material costs £0.60 £0.90
Direct labour cost £0.14 £0.20
Production and Sales volume 15,000 cakes per 5,000 cakes per month
month
Estimated Manufacturing overhead for 2002 was £20,000 per month

The ginger cake sells for £3.00 and Tasty Cakes Ltd wish to set the price of the iced
raisin cake to make the same profit per unit as the ginger cake.

During the six months, January to June 2002, total actual sales were, Iced raisin cake
60,000 units and Ginger cake 60,000 units. This put pressure on some production
departments. Management investigated the use made by each product of the different
resources and the proportion of indirect manufacturing overhead which relate to each
resource. The calculations based on estimated sales were as follows:

Budgeted 2002 Driver units Driver units

Activity Driver costs per driver per ginger per iced raisin
unit cake cake
Mixing Labour time £0.04 5 8
Cooking Oven time £0.14 2 3
Icing Machine time £0.18 0 3
Packaging Machine time £0.08 3 7

Required:

(a) Calculate the 2002 unit product cost of the ginger cake and the iced raisin cake
based on the original costing system and the price of the iced raisin cake.
(6 marks)

(b) Calculate the 2002 unit product cost of the ginger cake and the iced raisin cake
based on the activity-based costing system. (6 marks)

(c) Describe three uses Tasty Cakes Ltd might make of the activity-based cost
numbers. (7 marks)

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(d) The actual manufacturing cost for January to June 2002 was as follows:

Activity area 2002 Actual costs

Mixing £28,500
Cooking £38,400
Icing £18,000
Packaging £39,600
£124,500

Calculate the under/ over absorption of overhead for the period January – June
2002 for each category of overhead identified by the activity based system and
explain why the under/ over absorption has occurred. (6 marks)
[2003/ Zone B/ Q4]

Question 4:

Discuss the purposes, advantages and limitations of implementing Activity Based

Costing in Organisations. [2007/ Zone B/ Q8]

Question 5: Refer to past year exam question 2008 Zone A Q2

Question 6: Refer to past year exam question 2008 Zone B Q2

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Question 7

[2006 /Zone B/ Q3]

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Bhimani et al (2019) Textbook Questions:

Chapter 11, questions 11.2, 11.6, 11.8 and 11.10.

Readings:

Bhimani et al (2019) Textbook Activity-Based Costing-Activity-Based Management,

Chapter 11 pages 316-339 and Chapter 14, the section ‘Activity based budgeting’ only,
pages 441-442.

UOL Subject Guide 2019, Chapter 4 ABC & 5 ABM, pages 51-70

References:

Ahrens T. 2005, Management Accounting, UOL Subject Guide, University of London

International Programmes, Publications Office, UK.

Bhimani A., C.T. Horngren, S.M. Datar and M. Rajan, 2019 Management and Cost
Accounting. 7th edn. Pearson Education, UK.

Blocher, E.J., Stout, D.E. & Cokins, G. 2010, Cost Management: A Strategic Emphasis,
5th Ed., New York, USA: McGraw-Hill.

Drury, C., 2015, Management and Cost Accounting, 9th Edn, Cengage Learning EMEA,
UK.

Garrison, R.H., Noreen, E.W., Brewer C. P., Cheng, N.S. & Yuen, K.C.K. 2012
Managerial Accounting: An Asian Perspective, McGraw-Hill/Irwin, New York.

Horngren, C. T., Datar S. M. & Rajan M. V. 2015, Cost Accounting: A Managerial

Emphasis 15th Edn. Pearson Education Ltd. England.

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