Cambridge International A Level · Accounting (9706)

Activity based costing (ABC): Practice Questions

3 multiple-choice questions marked as you go, and 3 written questions with worked solutions. All on Activity based costing (ABC).

6 questions21 marksFree, no account

Question 1

1 mark

In an Activity Based Costing (ABC) system, what term is used to describe a factor that causes a change in the cost of an activity?

Question 2

1 mark

A company manufactures two products, X and Y. Product X is a low-volume product that requires complex and frequent machine set-ups. Product Y is a high-volume product that requires very few machine set-ups. If the company switches from a traditional absorption costing system (using direct labor hours) to an activity-based costing (ABC) system, what is the most likely effect on the unit costs?

Question 3

1 mark

Which of the following scenarios would provide the strongest justification for a manufacturing company to adopt Activity Based Costing (ABC) instead of traditional absorption costing?

Question 4

5 marks

A manufacturing company uses activity based costing. Product Z is produced in batches of $50$ units. Each batch requires $5$ machine setups at a cost of $ \$80 $ per setup and $12$ quality inspections at a cost of $ \$30 $ per inspection. The direct material and labour costs are $ \$25 $ per unit.

Calculate the total production cost per unit for Product Z.

Write your answer out first, then check it against the worked solution.

Question 5

6 marks

A company allocates total overheads of $ \$200,000 $ using machine hours ($ 10,000 $ total hours). It considers switching to Activity Based Costing (ABC) with two pools: Setups ($ \$120,000 $; $ 400 $ setups) and Inspection ($ \$80,000 $; $ 800 $ inspections). Product Alpha uses $ 5 $ machine hours, $ 2 $ setups, and $ 1 $ inspection per unit.
Calculate the increase or decrease in the overhead cost per unit for Product Alpha if ABC is adopted instead of the traditional method.

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Question 6

7 marks

Omega Ltd manufactures two products, Deluxe and Basic. It currently uses a traditional absorption costing system based on direct labour hours to allocate its total budgeted overheads of $\$240,000$.

Additional data is provided below:
- Ordering costs: $\$90,000$ (Cost driver: Number of orders)
- Quality control: $\$150,000$ (Cost driver: Number of inspections)

Resource usage:
- Deluxe: $400$ orders; $250$ inspections; $2,000$ labour hours; $500$ units produced.
- Basic: $200$ orders; $500$ inspections; $8,000$ labour hours; $2,000$ units produced.

(a) Calculate the total overhead cost per unit for the Deluxe product using the current traditional absorption costing method.
(b) Calculate the total overhead cost per unit for the Deluxe product using Activity Based Costing (ABC).
(c) Evaluate the impact on the reported profit per unit of the Basic product if the company switches from traditional absorption costing to Activity Based Costing.

Write your answer out first, then check it against the worked solution.

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