FREE ACCA P4 LSBF STUDY NOTES 2017-2018 - FREE ACCA STUDY MATERIALS
FREE ACCA P4 LSBF STUDY NOTES 2017-2018 - FREE ACCA STUDY MATERIALS
Criticisms of absorption costing are
- A big amount of guess work in relating overhead costs to the products.
- Inappropriate bases to link overheads to products
- Can only work in single product and simple manufacturing environments
Recent changes in manufacturing
The reason for the increasing inaccuracy of absorption costing is due to two basic issues:
- Increased production complexity
- Increased proportion of overhead costs.
Production complexity
A wide variety of production processes have become more complex in recent years in a numberof ways:
Click for more books or visit our website (www.booksg.com)
- Flexible manufacturing systems allow for a number of widely differing products to be
produced on the same machinery. Absorbing overhead on a simple volume base is
unlikely to reflect the differing overhead costs incurred by each product.
- Fast product development may mean that many differing iterations of the same
product may be produced in quick order. With such products having differing production
volumes again a volume base is unlikely to work.
- Wider product ranges lead to a more complex cost analysis.
Increased proportion of overhead costs
Overheads have increased in importance as a percentage of total costs due to both the
substitution of direct labor with indirect labor as companies merchandise to a greater degree.
Also, the increased production complexity outlined above has given rise to increased costs for
such disciplines as production planning and logistics.
Increased proportion of support services‟ costs
Activity based costing also introduces the important aspect that cost is incurred in selling and
distributing a product and the cost of servicing customers are often more important than
production therefore an accurate cause effect relationship should be established as to what
generates the cost and what is the real impact of this cost on the volume of units sold.
FREE ACCA P4 LSBF STUDY NOTES 2017-2018 - FREE ACCA STUDY MATERIALS
