3) Activity-based Costing Flashcards
How are Modern Production Environments changing and what is the impact?
More machinery and computerised systems being used
Smaller batch sizes
Less use of direct labour
More indirect overheads (insurance, depreciation etc)
Less direct labour costs
Marginal and Absorption costing becoming more inaccurate
What is Activity-based costing?
It is an alternative approach to product costing. It firstly allocates overheads to cost pools before absorbing them into units or cost drivers
What is a cost pool?
is an activity that consumes resources and for which overhead costs are identified and allocated. For each cost pool, there should be a cost driver
What is a cost driver?
a unit of activity that consumes resources. An alternative definition of a cost driver is a factor influencing the level of cost
How can you identify activities that consume overhead resources
Logistical transactions – Activities or transactions concerned with moving materials or people
Balancing transactions – Ensuring resources required for an operation are available (Buying)
Quality transactions – Inspections, handling customer complaints
Change transactions – change in demand, designs, deliveries, scheduling
