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Activity Based Costing

Activity Based Costing

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Published by: hiralpoonater on Apr 08, 2013
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04/16/2013

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ACTIVITY BASED COSTING

and activities to cost objects based on a cause-and-effect relationship. • It is a costing system which focuses on activities performed to produce products. . • Activities are responsible for incurrence of Costs. • ABC is that costing in which costs are first traced to activities and then to the products.Meaning • Activity-Based Costing is a methodology that assigns resources to activities.

• Cost driver need to be identified .• Provide Quality of information to design a cost system. • Distinction between cost behavior patterns which are volume. diversity. events & time.

Identify activities Determine cost for each activity Determine cost drivers Collect activity data Calculate product cost .

Benefits / Advantages of ABC • • • • • Focus attention on Activities Most accurate product / service costs Managers manage activities and not products ABC focuses on cause and effect relationship ABC highlights problem areas easily .

Limitations / Weakness of ABC • ABC fails to encourage managers to think about changing work processes • ABC does not conform to GAAP • Costly for long run • ABC does not encourage the identification and removal of constraints creating delays and excesses .

product level and facility level are identified. level. cost behavior is not portrayed 4. Overheads are first related to the activities or grouped into cost pools.e. to 3. Activity cost drivers can be used to 2. Since the overheads are related to the behavior since the overheads are cost centre. facility manufacturing cost hierarchy i.Difference between ABC and Absorption Costing abc absorption costing 1.e. All levels of activities in the 4. ascertain cost of products only. i. . a realistic picture of the related to the cost drivers. Overhead rates are used determine the cost of the cost objects. batch level. various production and service departments. Only two levels of activity. unit level and level are identified. It portrays more realistic cost 3. Overheads are first related to the 1. 2.

of Production Runs No. of Receiving Orders No. of orders Placed Items in Stock No.Examples of Activity and its Cost Drivers • • • • • • • • • • Machine Set-up Purchase Materials Warehousing Material Handling Inspection Quality Testing Receiving Material Packing Store Delivery Line Item Ordering • • • • • • • • • • No. of Packing Orders No. of Store Delivers No. of Parts Inspection per Item Hours of Test Time No. of Line Items .

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