WEEK-11

ACTIVITY-BASED COSTING
(ABC)
Dra. Ch. Wiwik Sunarni, MSA, Akt, C.A., AMA
INTRODUCTION…….
• Originally ABC is cost information system based on activity with
the main purpose is motivating people doing long-run cost
reduction through managing the activities well
• Philosophy ABC system:
1. Cost is caused
2. The causes of cost can be managed
• The strength of ABC:
1. Informing provide information on activities
2. Empowering empowering employees in doing cost reduction
INTRODUCTION
• Firm recognize the value of variety in attracting customer but also
expect price to recover all cost and give profit
• A Company with multiple product, accurate product costing is
critical in product pricing
• Allocating indirect cost traditionally: single rate, departmental
rate
• Managing the trade off between the value of variety in market
with the cost complexity in the plant requires accurate product
cost
Activity based costing
• Each component of overhead is caused by some activity
• Each product should be charged for a share of
component based on thet activity that it cause
• Activityies: unit level, batch level, product level and
sustaining level
• Activity based allocation adopts a long run perspective
• Indirect costs is now the dominant part of cost, and
business are desperealy seeking ways to understand
why its growth so undermines their effort to generate
adequate profits
COMPARISON COSTING SYSTEM
ABC: MANAGERIAL IMPLICATION

• Higher volume products will be over costed relative to low

volume products with traditionally approach
• The high-volume products are subsidizing the low- volume
ones, but te accounting system camauflages the subsidy
SYMPTHONS OF OUTDATED COSTING SYSTEM
ABC IS A STRATEGIC TOOL NOT AN ACCOUNTING SYSTEM

• Volume based approaches using DLH or MH are inaccurate

and strategically useless in dynamic environment
• ABC APPROACH SUBTANTIALLY MORE ACCURATE IN
ASSIGNING INDIRECT COSTS TO PRODUCTS
• ABC is just financial tool of strategic management or even
one of the most important
ABC: THREE BASIC PROBLEMS
• A Static versus Dynamic View Of Cost
• Adherence to an Obsolete Distinction Between Product
and Period Costs
• Costing Products Through Today’s Activity Chain Assumes
Today’s strategy