ACCA F5 notes

 ACCA F5 notes Article

We make use of Activity structured costing (ABC) top workout the cost every unit. This can be used for: Products on hand valuation

To record costs

To cost products

Making decisions

Absorption priced at, this looks with the total development cost every unit.

Total cost

Production CostsNon-production costs

Eg. Offering and distribution

Cost, advertising and marketing, cleaning,

Nearly all

Direct/prime costsIndirect costs

For example. Materials/labour(production overheads)

Eg. Manufacturing plant rent, electrical power,


Ingestion costing targets production costs only.

Direct materials per unitX

Direct labour every unitX

Development overhead every unitX

Total production expense per unitX

ABC provides needed to be produced for a number of causes:

Overheads driven by production in traditional manufacturing, ingestion costing is based on the principal the fact that production expenses are motivated by the level of production. The experience level could be on devices, labour or machine hours. These all increase when the amount of production raises. However nowadays businesses generate so many different items. Overheads had been small with regards to other costs in classic manufacturing, during the past such things as downgrading would have been a more compact proportion of production expenses, as creation would have recently been more labour intensive. Ultimately causing higher immediate costs instead of indirect. Complexness and diversity of products in contemporary manufacturing, typically now work in a highly competitive environment therefore, the products are becoming more complex and diverse. For example. Cadbury now produce more than 20 chocolate bars where as the dairy products milk club is quite simple to make, the cream egg is harder and so the intricacy should be taken account when ever deciding what drives the availability overheads.

Calculating full production cost employing ABC

The first step : Group production overheads in activities, relating to the way they are influenced. A cost pool is a hobby which consumes resources and then for which expenses are determined and allocated.  For every single cost pool area, there should be an expense driver.  The terms ‘activity' and ‘cost pool' are often used substituted. Step 2:  Identify cost drivers for each activity, i. e. what causes these kinds of activity costs to be sustained. A cost new driver is a element that impact on (or drives) the level of cost. Step 3:  Calculate an OAR for each activity

The OAR can be calculated in the same manner as the absorption being OAR. Nevertheless , a separate OAR will be calculated for each activity, by taking the game cost and dividing by cost rider information. Step 4:  Absorb the game costs into the product

The activity costs should be assimilated back into the person products. Step 5:  Calculate the total production price and/ and also the profit or loss. Several questions ask for the production expense per product and/ or the profit or perhaps loss every unit. Different questions ask for the total development cost and/ or the total profit or perhaps loss. Pros and cons of HURUF


Offers a more accurate cost per product. Therefore:

1 ) Pricing may be based on more realistic info, price depending on more accurate price data. 2 . Sales strategies will be more comfortably based

several. Decision making may be improved

4. Performance supervision can be improved.

Supplies a better regarding what travel the overhead costs. Therefore administration can understand overheads costs better and then they can be controlled easier. Considers overhead costs that are not related to development and sales volume. It might be applied to get realistic costs in a organization environment. It could be applied to every overhead costs not only production overheads. Can be used operating costing as well.


Limited benefit in case the overhead is known as a small percentage of total cost, or overheads happen to be primarily volume level related. Impossible to designate all overhead costs to certain activities. The choice of activities and drivers could be...