Scribd
Upload
103 views2 pages

Activity Based Costing

Activity-based costing (ABC) is an approach that involves tracing resource consumption and costing final outputs by assigning resources to activities and activities to cost objects based on consumption estimates using cost drivers. The key assumptions of ABC are that activities consume resources, resource consumption drives costs, products use activities, and all overhead costs are variable in the long run. ABC uses activity cost pools to group all cost elements associated with an activity and cost drivers to determine what factors cause changes in activity costs. ABC provides benefits like improved quality management, cost control, identification of support activities, and more accurate product pricing. However, ABC also faces criticisms like not all overheads being suitable, arbitrary cost allocation still being necessary, and high implementation costs.

Uploaded by

Dinesh Lalwani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
103 views2 pages

Activity Based Costing

Activity-based costing (ABC) is an approach that involves tracing resource consumption and costing final outputs by assigning resources to activities and activities to cost objects based on consumption estimates using cost drivers. The key assumptions of ABC are that activities consume resources, resource consumption drives costs, products use activities, and all overhead costs are variable in the long run. ABC uses activity cost pools to group all cost elements associated with an activity and cost drivers to determine what factors cause changes in activity costs. ABC provides benefits like improved quality management, cost control, identification of support activities, and more accurate product pricing. However, ABC also faces criticisms like not all overheads being suitable, arbitrary cost allocation still being necessary, and high implementation costs.

Uploaded by

Dinesh Lalwani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
You are on page 1/ 2

F-5 Dinesh Kumar

IFAS HYD
Activity Based Costing
Definition
An approach to costing and monitoring of activities which involves tracing resource
consumption and costing final outputs. Resources are assigned to activities and activities
to cost objects based on consumption estimates. The latter utilize cost drivers to attach.
Assum!tions under"ying ABC
(a) Activities consume resources ;
(b) the consumption of resources Drives cost
(c) products, services and other cost objects use activities;
(d) although some overhead costs are variable in the short term, in the longrun, all
overhead costs are variable.
#erms used in ABC
Activity cost pool. A grouping of all cost elements associated with an activit!.
Cost driver. An! factor which causes a change in the cost of an activit!.
Benefits of Activity Based Costing
The use of A"# methods offers a number of benefits $
Qualit! management is aided $ %t helps to remove waste (i.e. &on value adding activities)
Understanding of cost b! managers is improved. 'ow the overhead is spent (
Efficient cost control $ The effective control rests on )#ontrollabilit!*
Support activities are identified and better controlled.
Ta+es account of fi,ed overhead costs into the calculation of )-rofitabilit!*
Ma+e of bu! decisions rest on a comparison of )relevant costs*. .ith A"# fi,ed
overheads are relevant because the decision ma! cause change in overhead cost.
Accountabilit! of managers becomes defined. The! become responsible for their actions
Design of products/services $ )0esign out* the higher costs caused b! the cost drivers.
Effective product pricing. .hen )full cost plus mar+up* is used.
$%$&'Y (&)
Remember b! using A"# a )1234T* is )5A03* to improve decisions and reduce and
control costs.
'e"evance of Activity Based Costing
Activit!based costing could provide more meaningful information about product costs
and profits when $
C omple, products or services are involved
O verhead costs are related to products / customers, not vo"ume*
S ome products or services are sold in large numbers but others are sold in small volume
T ailored made products. -roducts made to customer specifications, as in 6ob costing
S ignificant service overhead costs e,ist which are not easil! assigned to individual products
A"# is method is sharing )#74T4* between products or services
+- 5 Dinesh Kumar
IFAS HYD
Criticisms of introducing Activity-Based Costing
The main criticisms directed against introducing A"# s!stem are listed below $
M any overheads are not suita,"e for ABC. %t could be argued that decisions cause costs,
or the passage of time causes cost, or that there ma! be no one clear cause of cost.
A r,itrary cost a!!ortionment may sti"" ,e necessary. 4ome overhead costs are difficult
to assign to products and customers, for e-am!"e .#hief 3,ecutive*s 4alar!*
N o one c"ear cause of cost can ,e identified. The abilit! of a single cost driver to full!
e,plain the cost behaviour of all items in its associated pool is 8uestionable.
I nformation re/uired. %t ma! be difficult to collect the information re8uired to enable
A"# to be introduced. %nformation collection and retrieval s!stems need to be e,panded
and improved.
C osts invo"ved. A"# has been found to be a ver! highcost accounting technolog!.
#osts ma! outweigh the anticipated benefits of A"#.
$%$&'Y (&)
#ompanies should not be too )5A&%#* in their enthusiasm to introduce an A"# s!stem
5anic means 0 invo"ved in menta" i""ness mar1ed ,y e-citement or vio"ence2
+ossi,"e Costs and Drivers used*
Cost Pool Cost driver
5aterial -rocurement &o. of orders
5aterial handling &o. of material movements
4etups &o. of 4etups
5aintenance &o. of maintenance hours
1ualit! control &o. of inspections
5achiner! (-ower, depreciation etc) &o. of machine hours.
"e proud of ever!thing that is uni8ue about !ou. Remember . . . . . . .
Every bees honey is sweet
9rench -roverb

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy