Activity based costing, Managerial Accounting

Activity Based Costing (ABC) differs from Absorption Costing (AC) in the manner in which overheads are charged to units.

ABC charges overheads to units based on their proportionate consumption of the driver of each separate overhead activity

Key Terms

Cost Pool

Cost Driver & Prime Driver

Prime Driver Rates

Activity Based Costing – The Advent of ABC (Ignore Inflation)

Activity Based Costing – Steps

Identify overhead activities

Decide on prime driver of each overhead activity

Record overhead activity cost in cost pools and the number of prime drivers for each overhead activity for the period

Determine the prime driver rates 

Charge overheads to units based on their proportionate consumption of the driver of each separate overhead activity.

Activity Based Costing – Arguments For

Provides a more accurate assessment of unit costs

Underpins the competitive pricing of units on a cost plus basis

Provides an improved insight into the drivers which may lead to cost reduction opportunities

Highlights the cost of overhead activities for benchmarking against best practice/industry averages etc

Helps management assess the value added proposition of internal overhead activities

Activity Based Costing – Arguments Against

Consumes increased resources to identify and record cost pools and cost driver activity

There are many factors which influence the cost of an overhead activity in addition to the prime driver

The selection of the prime driver of each activity is  subjective

It is considered as simply an extension of Absorption Costing (AC) 

Posted Date: 7/12/2012 6:24:31 AM | Location : United States







Related Discussions:- Activity based costing, Assignment Help, Ask Question on Activity based costing, Get Answer, Expert's Help, Activity based costing Discussions

Write discussion on Activity based costing
Your posts are moderated
Related Questions
What is cvp?

Carrying costs of inventory These are costs incurred because the firm has decided to maintain inventories. They generally consist of: •    Stock-out costs •    Insurance co

How might a company use regression results to manage overhead costs?

Kaizen and management Management has two major components: 1) Maintenance 2) Improvement. The aim of  the maintenance function is to maintain current technological man


The most ticklish difficulty that is faced through the finance manager is the resolve of the amount of working capital requirement at a specific level of production. To resolve thi

1)Prepare a three (3) year forecast of estimated future cash flows for you company and give valid economic/business reasons for your projections. This means you will have a stateme

briefly discuss five characteristics of relevant cost

I have two problems due in two hours can you do this for me?

Computing equivalents units and assigning costs to completed units and ending work in process; no beginning inventory or cost transferred in (30 -45min) Sue Electronics makes CD p