ABC Costing Flashcards
What is ABC Costing?
Allocate overheads to products on the basis of their usage of service rather than volume of output
Reasons for ABC Costing?
- Ovearheads used to be small in relation to other costs in traditional manufacturing
- Overheads are now a larger proportion of total costs in manufacturing leading to production overheads increasing more than direct costs
- Increased diversity and complexity of products
Advantages of ABC Costing
- Accurate cost per unit
- Provides insight into what drives overhead costs which increases future efficiency
Disadvantages of ABC Costing
- Time consuming
- Expensive
Brief overview of ABC Costing
1- Identify cost drivers (factors which determine the size of an activity or cause the cost of an activity)
2- Collect costs associated with each activity into cost pools
3- Charge costs to products on the basis of the number of an activities cost driver they generate
Steps in ABC Costing
1- Group overheads into activities (cost pools)
2- Identify significant factors driving the costs (cost drivers)
3- Calculaye the cost per unit of cost drivers (OAR)
4- Calculate the cost attributable to each product
5- Absorb costs based on usage of drivers
Pricing implication of ABC Costing
Decisions improved as the price will be based on more accurate cost data
Decision making implication of ABC Costing
Improved as research, production and sales effort can be directed towards most profitable product
Performance management implication of ABC Costing
ABC can be used as the basis for budgeting and forward planning. More realistic overheads = more accurate budgets = more accurate performance management
Overhead costs implication of ABC Costing
Improved understanding allows for increased efficiency reducing overhead costs
Sales stratergy implication of ABC Costing
Better understanding of the profitability of products
