CIMAPRO19-P02-1 Exam - Topic 3 Question 8 Discussion

Question

Under the absorption costing system, which simply allocates our entire amount of production overheads based on machine hours, we have found that out of our 4 products, 2 are profitable, 1 breaks even and 1 is making a loss.

Model D the most recent addition to the range is making a large loss after the price of a major component rose dramatically. Model A is only just breaking now too as costs have risen. The only two products making profit

are Models B and C. These two require the least about of machine hours so this makes sense.

However, the management have a few reservations. They cannot understand how B is so profitable. It requires several more stages of production than the other models and a whole day longer to be customised by an expert.

Select the correct answer from the list below that can help to explain this situation.

Matthew · Accepted Answer

A) ABC would show that only a small amount of our overheads are based on machine hours.

Matthew · Answer

B) ABC could have shown that some products are selling poorly and should be discontinued.

Matthew · Answer

C) ABC would show that if overheads are shared equally that model B would be less profitable.