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Activity Based Costing

Activity based costing (ABC) assigns costs to activities rather than products or services to more accurately allocate resource and overhead costs. It identifies activities, measures resource costs, determines cost drivers and consumption rates, and assigns activity costs to products. ABC benefits include more accurate costing, price fixation, identifying customer profitability, and choosing distribution channels. However, ABC is not suitable for all companies and cannot prepare periodic profit statements, but supports strategic decision making.

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28 views7 pages

Activity Based Costing

Activity based costing (ABC) assigns costs to activities rather than products or services to more accurately allocate resource and overhead costs. It identifies activities, measures resource costs, determines cost drivers and consumption rates, and assigns activity costs to products. ABC benefits include more accurate costing, price fixation, identifying customer profitability, and choosing distribution channels. However, ABC is not suitable for all companies and cannot prepare periodic profit statements, but supports strategic decision making.

Uploaded by

jasleenkaur
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ACTIVITY BASED COSTING

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3/19/12

Activity based costing is an accounting methodology that assigns costs to activities rather than products or services This enables resource and overhead costs to be more accurately assigned to the products and the services that consume them
3/19/12

ABC STEPS

Identify activities and resources the organization is broken down into main activities which may be meaningful in terms of cost estimation, evaluation and control. Such as ordering of materials, quality inspection, R&D etc Measure the costs of resources used to perform each activity-cost are assigned to cost pools for each 3/19/12

Determine cost drivers and resource consumption rates-cost driver is the factor which causes the change in costs of an activity-main cost drivers are machine time, labour hours, quantity handled etc Assign activity costs to products by multiplying the use of the cost drivers by the resource consumption rates3/19/12

Advantages/Benefits of ABC system

ABC besides providing more accurate basis for calculating product costs has other benefits too.. Its benefits may be summarized as under: Measurement of performance- this is done by identifying responsibility or accountability for cost behavior

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Price fixation- this is done by 3/19/12 identifying the true cost of product

4. Customer profitability- helps to know which customer yields more profit- this is done by identifying the cost or profitability of type of customer 5. Choosing channel of distributionthis is done by analyzing the cost and performance of alternative distribution channels
3/19/12

Limitations

ABC is not appropriate for all companies particularly those where overheads are relatively small and which do not produce a wide range of products This method cant be used to prepare monthly or periodical profit statement ABC is more suitable to support 3/19/12 strategic decision making ,

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