ACCA F5 - Performance Management - Chapter 4 Life cycle Costing

Aug 29, 2026

ACCA F5 Performance Management course notes provide structured study guidance for exam candidates, focusing on traditional costing approaches and their implications for decision-making and profit reporting. The chapter set explains cost determination, classification of direct versus indirect (overhead) costs, absorption costing mechanics, and how over- or under-absorbed overhead arises from budget versus actual activity and spend. It also covers the marginal costing foundation, contribution logic, and profit reconciliation driven by closing inventory changes, plus comparisons of absorption and marginal costing advantages and drawbacks.

LanguageEnglish

CategoryExam

FormatPDF

Pages54

Reading Time2 h 16 min

AccessFree to download

Chapter 1 Costing

Types of costs

Traditional costing method (absorption costing)

Over/under absorption

Marginal costing

Profit reconciliation

Chapter 2 Activity Based Costing

Chapter 4 Life cycle Costing

| | | --- | | | | ACCA F5
Performance Management
Course Notes for Exams up to December 2019
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[Instructor Name:](Instructor Name:)
Faisal Farooq
B.Sc., ACCA, FPA
Email: [faisal@accountancytube.com](faisal@accountancytube.com) | | | Content Chapter 1 Traditional Costing methods Chapter 2 Activity Based Costing Chapter 3 Target Costing Chapter 4 Life cycle Costing Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 | Chapter No. 1
COSTING

It is the process of determining cost of units produced or services provided.
Types of costs
Direct costs: is the cost that can be traced to the product or service to which it was incurred.
It includes direct material, direct labour and direct expenses and it is part of production cost of a unit, which goes on to form the total cost.
Indirect costs: It is not directly traceable to the product or service to which it was incurred; there are two types of indirect costs, production and non-production. Indirect costs are also known as overheads.
Dealing with overheads
Traditional costing method (absorption costing): under this method we absorb fair share of production & sometimes non production overheads to product or service costs.
Example:
Saturn, a chocolate manufacturer, produces three products:
• The Sky Bar, a bar of solid milk chocolate.
• The Moon Egg, a fondant filled milk chocolate egg.
• The Sun Bar, a biscuit and nougat based chocolate bar.
Information relating to each of the products is as follows:
Details Sky Bar Moon Egg Sun bar
Annual production overheads = $ 80,000
Required:
Using traditional absorption costing, calculate the full production cost per unit and the profit per unit for each product. Comment on the Implications of the figures calculated.
Answer: Watch Video lecture for answer | | | --- | --- | | | | | | | | | | | | | --- | --- | --- | --- | | Direct labour cost per unit ($) | 0.07 | 0.14 | 0.12 | | Direct material cost per unit ($) | 0.17 | 0.19 | 0.16 | | Actual production/sales (units) | 500,000 | 150,0000 | 250,000 | | Direct labour hours per unit | 0.001 | 0.01 | 0.005 | | Direct machine hours per unit | 0.01 | 0.04 | 0.02 | | Selling price per unit ($) | 0.50 | 0.45 | 0.43 | | Over or under absorption
Over-or under-absorbed overhead occurs when overheads incurred do not equal overheads absorbed.

Over-absorption means that the overheads charged to the cost of production or sales are greater than the overheads actually incurred.
Under-absorption means that insufficient overheads have been included in the cost of production or sales.
Suppose that budgeted overhead in a production department is $80,000 and budgeted activity is
40,000 direct labour hours. The overhead recovery rate (using a direct labour hour basis) would be $2 per direct labour hour.
Suppose that actual overheads in the period are $84,000 and 45,000 direct labour hours are worked.
Overhead incurred (actual) 84,000
Overhead absorbed (45,000 x $2) (90,000) Over-absorption of overhead 6,000
In this example, the cost of production has been charged with $6,000 more than was actually spent and so the recorded cost of production will be too high. The over-absorbed overhead will be an adjustment to profit at the end of the accounting period to reconcile the overheads charged to the actual overhead.
Reasons for over/under absorption
• Actual overhead costs are different fr

FAQs

What is the purpose of costing in this chapter?

Costing is the process of determining the cost of units produced or services provided. It supports calculating full production costs and evaluating profit outcomes.

How does over-absorption or under-absorption affect recorded profit?

Over-absorption occurs when overhead absorbed exceeds overhead actually incurred, making recorded production costs too high and requiring profit adjustment. Under-absorption occurs when insufficient overheads are included, lowering recorded production costs.

Why do absorption costing and marginal costing report different profits?

The difference is driven by closing inventory levels. If inventory increases, absorption costing reports higher profit; if inventory decreases, it reports lower profit than marginal costing.

Aug 29, 2026

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