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
Elimination of non-value added activity JIT manufacturing can be described as a philosophy of management, dedicate to the elimination of waste. Waste is stated as anything whic

What story or character in a story generated what Aristotle calls a "catharsis?" Describe your emotional response. What specifically caused your emotional response?


Problem From the following data, calculate overhead variances of following: (a) Variable overhead expenditure variance (b) Fixed overhead expenditure variance (c) Total ov


accepted#Regarding the Overhead costs, these are allocated based on Direct Labor;

Explain the practical application of differential costing with examples

Question 1: A company's budgeted production of Product Zebra for the month ending 30 November 2004 was 10,000 units. The fixed overheads were budgeted at Rs3,200,000. The st

X ltd. has a current ratio of 4.5:1 and acid test ratio of 3:1. If its inventory is Rs. 24000, find out its current liabilities.

Cost volume profit analysis Meaning and definition Cost volume profit analysis is a technique for studying the relationship between cost volume and profits . profits of an