Which of the following is a challenge when calculating absorption costing?
A.
Attributing a fair amount of overhead to each unit of production
B.
Attributing fair cost drivers and cost pools to each unit of production
C.
Understanding the profit element as a percentage of cost
D.
Understanding the profit element as a percentage of selling price
The Answer Is:
A
This question includes an explanation.
Explanation:
Absorption costing allocates indirect overheads to units, which is inherently judgemental; selecting allocation bases that “fairly” load overhead to products is the well-known difficulty. (By contrast, option B describes activity-based costing concepts—cost pools and drivers.)
[Reference: CIPS L4M5 (2nd ed.), LO 2.2 – Costing methods (absorption vs ABC) for negotiation preparation., ===========, ]
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