Activity based costing Flashcards
What is ABC?
ABC is a system of allocating production overheads to products manufactured in a manner that is more equitable than the traditional method of using a single allocation base such as labour hours for all fixed overheads.
What does it recognise?
ABC recognises that low-volume products require a higher proportion of manufacturing support costs such as machine-set costs, inspection, packaging, ordering, selling, etc than high volume products.
Definition?
A system of cost allocation that
aims to use mainly cause-and-
effect cost allocations by assigning costs to activities.
Design?
1) Identify the major activities that takes place in an organisation.
2) Assign costs to cost pools for each activity.
3) Determine the cost driver for each major activity.
4) Assign the cost of activities to products according to products demand for activities.
What are the 4 main activities?
1) Unit level activities: relate to individual unit produced, e.g. DLH.
2) Batch-level activities: performed each time a batch of goods is produced, and not individual products, e.g. machine set-ups.
3) Product-sustaining activities: performed to support the different products manufactured, e.g. product testing procedures.
4) Facility-sustaining activities: performed to sustain a factory’s general manufacturing process, e.g. security.
Assigning costs to cost pools.
1) A cost pool involves related costs, such as departmental manufacturing overheads that are allocated to one or most cost objectives, such as products, services and activities.
2) The following factors should be considered in determining the number of cost pools:
The activity cost must be material in size in order to justify separate treatment
The cost driver should be identified as the most suitable for the cost pool, otherwise further division should be considered.
What are cost drivers?
The basis used to allocate costs to cost objects in an ABC system.
