ACCA F5 notes

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We use Activity based costing (ABC) top work out the cost per unit. This may be used for:
Inventory valuation
To record costs
To price products
Decision making

Absorption costing, this looks at the total production cost per unit.

Total cost

Production Costs Non-production costs Eg. Selling and distribution Cost, advertising, cleaning, Postage
Direct/prime costs Indirect costs
Eg. Materials/labour (production overheads) Eg. Factory rent, electricity, Depreciation

Absorption costing focuses on production costs only.

Direct materials per unit X
Direct labour per unit X
Production overhead per unit X
Full production cost per unit X

ABC has needed to be developed for a number of
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Such companies use this as Sony and Toyota.

Step 1: Estimate a selling price for a new product that considers how much competitors are charging and how much customers are willing to pay. This selling price will enable a firm to capture a required share of the market.

Step 2: Reduce this figure by the firm’s required level of profit. This could take into account the return required on any new investment and on working capital requirements or could involve a target margin on sales.

Step 3: Produce a target cost figure for product designers to meet.

Step 4: Reduce costs to provide a product that meets that target cost.

The target cost gap=estimated product cost-Target cost
This is the difference that the company thinks it can make the product for and what it needs to make it for to meet the desired profit.


Limiting factors, business face certain restraints they need to take account of in the planning;
Limited demand
Limited skilled labour & other production resources
Limited finance

If there is one limiting factor Key factor analysis is the best way to solve the problem.

Step 1: identify the bottleneck constraint.
Step 2: calculate the contribution per unit for each product.
Step 3: calculate the contribution per unit of the bottleneck resource for each product.
Step 4: rank the products in order of the contribution per unit of the bottleneck resource.
Step 5:

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