Activity Based Costing

r

ABC is where cost is attributed to cost unit based on the cost unit usage of activity

Definition: ?

activities drives cost

products demand activites

"activities go up cost go up''

Advantages

Subtopic

better u/std what drives ohd costs

better costing of pdt with complex prodn process

more ohd cost beyond factory floor

The method

Step 1Major activity

example:purchasing acti, prodn etc

Step 2: Cost drivers ( factors which determine the cost of activity)

Step3: For each cost driver cost pools

Step 4: CHARGE to cost units based on their usage of the activity

Disadvantages

only measurable cost drives can be used

cost benefits of accuracy

problematic implementn

Subtopic

some item may use other means of appn like rent,depn etc

a cost sriver may/may not explain all cost in c/pool

Why ABC

Wider range of products

overhead constitute large part of cost than dl dm

many cost are driven by non volume related act.complexity/range

high volume product will tend to bear higher overheads in trad.

Implication

Decision making

Pricing

Promotion

Discontinuation

Product change