Accounting 9706 · AS & A Level · Activity based costing (ABC)
Activity based costing (ABC) — practice question
Refer to Source B in the insert. Additional information: Simran was worried about the large number of units being returned. She thought that the workers were not paying enough attention when assembling the products. She considered fitting a system of surveillance cameras in the factory so that the workers could be watched. She believed that this would completely remove the returns. Simran would rent the camera system for a fixed period of three years. The cost of renting and monitoring the cameras would amount to $18000$ per annum. Simran decided that this would be added to the cost of the quality inspections. The higher total would then be allocated using the same basis as before.
(a)[1]
State what the term ‘cost driver’ means.
(b)[11]
Calculate the total profit or loss earned from the production of each product for a year.
(c)[5]
Calculate the revised total profit or loss earned from the production of each product for a year if the surveillance cameras were fitted and all returns were removed.
(d)[6]
Advise Simran whether she ought to install the system of surveillance cameras. Support your answer.
(e)[2]
Comment on how suitable the cost driver is for accounting for the cost of the surveillance cameras.
Worked solution & mark scheme
This 25-mark question has a full step-by-step worked solution and mark scheme. One marking point: “An activity that gives rise to costs in the production process” …