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
Acceptance and Allocation of Resources Managers, subsequent a review and analysis of all decision packages, will establish the level of resources to be assigned to each decisi

how do i use least squares method to solve semi average problem?

Coleman, a married taxpayer, is going to establish a manufacturing business. He anticipates that the business will be profitable immediately due to a patent he holds. He predicts t

Explain product cost Product costs are those costs which are associated with and directly identifiable with the product. In other words, which are assigned to the product are p

Interpretation of equity ratio As equity ratio show the relationship of owner funds to total assets higher the ratio or the share of the shareholders in the total capital of th

UNCERTAINTY OF DEMAND Demand is the most troublesome variable to predict accurately. Actually, demand may fluctuate from day to day, from week to week or from month to month. T

Which of the following costs is an example of a cost that remains the same in total as the number of units produced changes?

Explain Kaizen costing It is a Japanese method used to manage cost during a product s planning and design stages and has been used by some Japanese firms for over twenty years


State the Penetration pricing As opposed to the skimming pricing the objective of penetration pricing is to gain a foothold in a highly competitive market. The objective of thi