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The traditional system of costing suffers from certain limitations. It fails to precisely
assign the overhead costs into product units. Therefore activity-based costing system
has recently been developed to overcome the limitations of traditional costing system.
The activity costing system is based on premise that activities make a product.
Activity- based costing (ABC) is the determination of product cost based on the activity
needed for producing a product. The activities required to produce a product or render
service consume a cost. Therefore, an insight into the expenses consumed by all those
activities performed for the manufacturing of finished products and sale is
very important. A number of researched studies have shown the increasing utility of
activity-based costing on overheads allocation and apportionment for product cost
determination.
Product cost determination under activity-based costing is made on the basis of cost
driver required for producing goods or delivering services. Activity-based costing is
becoming more effective in costing of multi-products produced by industries and
executing customers' orders.
Activity-based costing (ABC) is an effective management approach for distributing and
controlling the overhead costs. Overhead analysis can be made more accurate by using
ABC techniques for a wide range of products, for product costing and profitability
analysis and for distribution and control of the overheads appropriately.
Identify and eliminate those products and services that are unprofitable and lower
the prices of those that are overpriced (product and service portfolio aim)
Or identify and eliminate production or service processes that are ineffective and
allocate processing concepts that lead to the very same product at a better yield
(process re-engineering aim
Applicability of ABC is bound to cost of required data capture. That drives the
prevalence to slow processes in services and administrations, where staff time
consumed per task defines a dominant portion of cost. Hence the reported application
for production tasks do not appear as a favorized scenario.