ACCA - F5 Study Questions With Complete Solutions

What are the 3+1 stages of absorption costing? correct answer: 1. Allocation 2. Apportionment 3. Absorption = Production Cost 4. Under/over = Non prod OH Why would you use Absorption Costing? correct answer: Valuing Inventory Pricing Decisions Establishing profitability What are pros and cons of absorption and marginal costing? correct answer: *Absorption* -Avoids varying profits if sales are seasonal -Consistent with accounting standards -Recognises Long Run variable costs -Implies OH related to production = Manipulate profit by increasing production -Old fashioned = assumes production of few items -Over allocates to high volume products *Marginal* -Cashflow and profit proportional to units sold -Separate Variable and Fixed = decision making -Short Run decisions = maximise contribution -Ignores importance of working at full capacity -Prices based on marginal cost may not cover Fixed OH What are steps for Activity Based Costing (ABC)? correct answer: 1. Identify Activities 2. Allocation + Apportionment to COST POOLS 3. Identify COST DRIVERS 4. Calculate absorption rate per unit Cost Driver 5. Charge OH to units based on usage of cost drivers What are the Pros and Cons of ABC? correct answer: *Pros* Simple (once data obtained) Focus on drivers Absorption linked to causes of OH Many drivers can be used *Cons* Complex = use if provides additional info One driver for many items in a cost pool Drivers difficult to identify What is the process for target costing? correct answer: Find selling Price Deduct profit margin = TARGET COST Est Cost - Target = COST GAP Reduce gap - reduce costs (without reduce value) - redesign - remove non value features - use standard components