Activity based costing

Question 1

Activity based costing definition

Answer 1

*An alternative approach to absorption costing using cost drivers to assign activity costs to units.

Question 2

When should activity based costing be implemented?

Answer 2

*ABC should only be introduced if the additional information provided will increase the organisations overall profitability. For example;
*Production overheads are high in relation to direct cost.
*Overhead resource consumption is not solely driven by production volume.
*There is a wide variety in the product range
*The overhead resource input varies significantly across the product range

Question 3

What are the steps to implement ABC?

Answer 3

*Establish cost pools.
*Identify cost drivers.
*Calculate a cost per unit of cost driver.
*Absorb activity cost into production based on usage of cost drivers.

Question 4

ABC advantages?

Answer 4

*Cost control and reduction.
*Better information for pricing decisions.
*Reanalysis of product mix.
*More realistic estimate of costs.

Question 5

ABC disadvantages?

Answer 5

*Time consume and expensive.
*Limited value if overheads are driven by volume.
*Still some arbitrary apportionment