ACCA Performance Management (F5) Certification Practice Exam

What basis does the traditional absorption costing method use to charge overhead to products?

1. Material usage

2. Volume based measure

3. Activity based measure

4. Specific identification method

The correct answer is: Volume based measure

The traditional absorption costing method primarily uses a volume-based measure to charge overhead to products. This approach captures the overhead costs incurred during production based on the number of units produced or machine hours used, which is commonly reflected in metrics such as direct labor hours or units of output. Using a volume-based measure means that costs are allocated evenly across all units produced, irrespective of the specific activities that went into creating each product. This method assumes a direct relationship between the volume of production and the overhead incurred, which simplifies cost allocation in environments with high volume and low complexity. This practice helps businesses understand unit costs at a basic level, but it may not provide insight into the specific drivers of cost that can be achieved with methods such as activity-based costing. However, for many traditional manufacturing operations, this approach has been widely implemented due to its simplicity and ease of understanding.