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
QUESTION 1: P A RT A You are the Cost Accountant of an industrial concern and have been assigned the duty of preparing a cost accounting system. Initially it has been de

Once the credit information is accumulated the subsequent step is to analyze the gathered information and isolate those matters that may need further investigation. The factors whi

Describe the important role that the corporate level strategy has in relation to the development of the business and functional strategy in a multi -business organization

Disadvantages of ratio analysis 1) False results: ratios are based upon the financial statement. In case financial ratio is incorrect or the data upon which ratios are based

The CP introduced in the Indian financial market, for the recommendations of the Vaghul Committee has turn into a well-liked debt instrument of the corporate world. Commercial Pape


The Pinewood Furniture Company Pty Ltd plans to design two lines of chairs in the coming year-lounge and patio. The company is considering introducing an activity-based costing sys


What is Costco''s Financial decisions, Centralized or decentralized?

Recognition of the Organization's Decision Units and Decision Packages ZBB decision unit is an operating division for which decision packages are generated and analyzed. It ca