Topic 6 Activity Based Costing

FIND A SOLUTION AT Academic Writers Bay


Problems with traditional product costing
systems

Activity based costing (ABC)

A simple approach to ABC

Traditional versus activity based product
costs

ABC issues

Limitations of ABC

ABC in service organisations
Problems with Traditional Product Costing Systems
Problems with Traditional Product Costing Systems

•Traditional product costing systemsTraditional product costing systems
-Direct manufacturing costs are traced to productsDirect manufacturing costs are traced to products
-Manufacturing overhead costs are allocated to Manufacturing overhead costs are allocated to productsproducts
-Calculation of manufacturing overhead rate using a Calculation of manufacturing overhead rate using a volumevolume–based cost driverbased cost driver
-NonNon–manufacturing costs are not assigned to manufacturing costs are not assigned to productsproducts
Problems with Traditional Product Costing Systems
Problems with Traditional Product Costing Systems (cont.)(cont.)

•Failure to adapt to the changing business Failure to adapt to the changing business environmentenvironment

•Causes of changes in cost structuresCauses of changes in cost structures
-Growing automationGrowing automation
-Greater product diversityGreater product diversity
-More investment in downstream areasMore investment in downstream areas
Indicators of Problems with a Product Costing
Indicators of Problems with a Product Costing SystemSystem

•Inaccurate product costs are likely when: Inaccurate product costs are likely when:
-The proportion of direct labour costs decreasesThe proportion of direct labour costs decreases
-The proportion of related and unrelated The proportion of related and unrelated manufacturing overhead costs increasesmanufacturing overhead costs increases
-NonNon–manufacturing costs that are product related manufacturing costs that are product related become substantialbecome substantial
-Product diversity increasesProduct diversity increases
Indicators of an Outdated Product Costing System
Indicators of an Outdated Product Costing System
Activity
Activity–Based Costing (ABC)Based Costing (ABC)

•Costing viewCosting view
-Considers how ABC can be used to estimate the Considers how ABC can be used to estimate the cost of cost objectscost of cost objects
-Attempts to improve the allocation of manufacturingAttempts to improve the allocation of manufacturingoverhead to productsoverhead to products

•Activity management viewActivity management view
-Assists management by identifying and analysing Assists management by identifying and analysing the characteristics of business activitiesthe characteristics of business activities
Source: Adapted from PBB Turney,
Source: Adapted from PBB Turney, Common Cents: The ABC Performance BreakthroughCommon Cents: The ABC Performance Breakthrough, McGraw, McGraw–Hill Education 1991. Copyright McGrawHill Education 1991. Copyright McGraw–Hill Hill Education.Education.
An Activity
An Activity–Based Costing ModelBased Costing Model
Activity
Activity–Based Costing TerminologyBased Costing Terminology

•ActivityActivity

•A unit of work A unit of work performed within the performed within the organisationorganisation

•Activity driverActivity driver

•A cost driver used to A cost driver used to estimate the cost of an estimate the cost of an activity consumed by activity consumed by the cost objectthe cost object

•Cost driverCost driver

•A factor or activity that A factor or activity that causes a cost to be causes a cost to be incurredincurred

•Resource driverResource driver

•A cost driver used to A cost driver used to estimate the cost of estimate the cost of resources consumed resources consumed by an activityby an activity

•Root cause cost driverRoot cause cost driver

•The underlying factors The underlying factors that cause activities to that cause activities to be performed and their be performed and their costs to be incurred costs to be incurred

YOU MAY ALSO READ ...  SITHCCC005 dishes using basic methods of cookery
Order from Academic Writers Bay
Best Custom Essay Writing Services

QUALITY: 100% ORIGINAL PAPERNO PLAGIARISM – CUSTOM PAPER