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    ACTIVITY BASED COSTING

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    ACTIVITY BASED COSTING

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    15 views10 pages

    Activity Based Costing

    Uploaded by

    princy
    ACTIVITY BASED COSTING

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 10
    ing this chapter you studying after ieee i Peale ty, explain the limitations of; "radition SYstem ti : understand the concept activity based cong ays 3 explain the various terms Useq inABe, Bo), i ssi ing oy, describe the advantages FAB, derstand the Process of unt . J INTRODUCTION 6. d costs are indirect cog W overhead departments, etc, The re ee oe Allocation, “PPortionment, Tea; itable bases. suital ‘l Product Jobs, COSt cen 5 OF cost Objects ON some a ‘Onment and fing ly abs mp ion overhead oo its or objects have been aproblematie area in ®staccounting i incost 4 ee of overhead COSts based gn dir ofa ethods ect material costs, etc, have ir : “ad cos hours, sed and assign overhead cos e ba: volum does the Consumption of pr S$ SO double: hich Canno, SE costs limes; traditional our OSts, direct bour hours, been Criticized The 4S0n being that all these me ts in Proportion to Production Volumes, €source and Consequent ly Overhead cost Sts Were designed When dire Production Volume S. Th i logies, cement in techno , i DAuGEINE 5 roduction hav innovation, ad f overhead costs in overall cost a ion o} ; Was the proportion t decrease in labour aha ofall ignifican a tho time a significa nponents, the traditional met ; cost com different c stribution, eto,, © grown manifold and at the same d. With the change in the Pate of of overhead costs Proved unsuitable — and caused distortion of cost information. Cooper and Kaplan (1998) have high in product cost information occuring due to the use of now unsuitable Volu distortion in cost information has started causing bad planning and decision maki Hence, need for a new approach to assign overhead costs to products were fet ia new approach called “Activity Based Costing” as a solution to the problem, ea They not a distinct method of costing like job costing and process costing, It is rath approach adopted during the course of ascertainment of cost of products or tevin 8, Vities, assigns the overhead costs on the basis of benefit received from indirect actj 6.2 ABSORPTION OF OVERHEADS : TRADITIONAL APPRO Ao Overhead costs are the common costs incurred fora number of products, jobs, oe g etc.: Following steps are adopted under traditional costing for final absorption of tens units: i "Shy i t () Collection and then allocation of overhead costs to cost centres i.e., product; » Production a, cost centres. Ns (ii) Apportionment of common costs to different cost centres on some Suitable bases tik of employees, floor space occupied, killowatt hours, etc.. em (iii) Re-apportionment of service centres costs to production centres. (iv) Absorption of production centre’s costs to cost units again on some bases like direct cost, direct labour hours, machine hours, direct material cost, etc. This method of absorption of overhead costs have been criticized on the following grounds 1. This method is primarily rely upon volume related bases, like direct labour hours, and; overhead costs changes in direct relation to production volume 2. Earliar product costs used to primarily consist of direct labour and direct materials, due to changing business environment in which direct labour usually account fo percent of the costs and material cost accounts for 45 to 55 percent that leaves | whooping 30 to 50 percent overheads. Overhead costs are no longer a burden, rat overhead costs are being incurred on product design, quality control, custome production planning and sales order processing, etc.. Hence, decrease in the la contents in overall cost of the product has made the traditional methods unsuitable fo a now major overhead cost. 3. Under the present costing, high volume products receive large allocation of res conversely low volume products absorb small allocations. As a result it undercosts | customized products. on labour hours, complex prog nduct ‘ vere , owl products requiring extensive py may have their overhead , nol! red more overhead costs but See arene DO! i vee othe! hand, simple products hthtioe to em Bee "het ered ost ents ofthe fiber cha dite Clonee } siness products manufacturing proce 7 fd et ve opines i ‘aheaape vg aistortion im the correct ascertainment ne sity et ional overend accounting to provide Ned | anne planning, decision makingand mt re ake fe vast Based Costing” moinetauees ach ACTIVITY BASED COSTING APPROACH HEADS: ‘ poVER ton oO pased Costing (ABC) was developed by Cooper and Kaplan a prt ivily g, overtiend costs to the ultimate cost obj : 4 Kaplan. “ABC system ¢ sis ects such a5 product and > According to CIMA Lon

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