Activity Based Costing Flashcards
What is activity based costing?
describe the traditional approach to full costing
the traditional approach to full costing
developed when industry was labour-intensive
and the **overhead costs were generally low **
compared to today.
what is activity based costing?
in recent times,
there has been capital-intensive and machine-paced production (machine are at the heart of production. Labour supports efforts of machine by maintaing etc.)
and a high level of overheads relative to direct costs - now common for overhead recovery rates to be multple of the hourly rate of pay due to signance of overheads
The result is the development of ABC – an
alternative approach to full costing
describe Activity Based costing
is a technique for more accurately relating
overheads to cost objects. It allocates indirect
costs on a more realistic basis that _takes
account of the activity and transactions that drive
the cost. _
overheads do not just happen, they are caused by something
what is ABC based upon?
It is based on acceptance of the fact that many
overheads do not just occur; they are caused by
activities, such as setting up machine and
handling orders, which “drive” the costs.
Examples of activity cost pools and cost drivers
- Costs relating to motor vehicle activity –
Kilometres travelled - Costs relating to machine activity (e.g.
depreciation & maintenance of machines) –
Machine hours - Cost of handling orders – Number of orders
- Cost of setting up machine – Number of set-ups
However by 2008/9:
Robotics had been introduced which:
reduced the use of labour substantially,
slightly increased the materials used but
increased the expenses of plant & machinery.
As a result the costs described as “overheads” in
2008/2009 are a far higher % of all costs.
With ABC, assumed that
Machine hours are the cost driver for plant &
machinery costs
Kilometres are the cost drivers for delivery costs
Assumed that :
Machine hours are the cost driver for plant &
machinery costs
Kilometres are the cost drivers for delivery costs
That the machine hours in 2008/9 were 5,400 of which:
2,200 were used for Product A
3,200 were used for Product B
That kilometres travelled in 2008/9 were 40,000 of
which:
15,000 were used to deliver Product A
25,000 were used to deliver Product B
ALLOCATE OVERHEADS WITH THE ABC APPROACH FOR 2008/2009
Allocating overheads:
Product A
- plant & machinery costs
= ($400,000/5,400hours) * 2,200 hours = $162,963
- Delivery costs
= ($50,000/40,000kms) * 15,000 km = $18,750
Product B
- plant & machinery costs
= ($400,000/5,400hours) * 3,200 hours = $237,037
- delivery costs
= ($50,000/40,000kms) * 25,000 km = $31,250
what is the major criticism of ABC?
The major criticism of ABC is that trying to
identify cost drivers, measuring and
allocating expenses can be time consuming and very costly and
the benefits from ABC in terms of more accurate costing and the potential for cost control, may not justify the
cost.
what are cost drivers?
traditional approach, direct labour hours drive costs, now not the case
ABC sees overheads as being caused by cost objects which must be charged with the costs they incur
costs do not just occur, caused by activties which ‘drive’ the costs
similarity between ABC and traditional full costing
overheads are charged to cost objects (goods or services)
describe what is a cost pool
an overhead cost pool is established for each cost driver. all costs associated with this activity would be allocated to the pool
overheads are then charged to units of output, through activity cost driver rates (products A and B)
how does ABC contrast with traditional approach
under traditional approach, overheads are normally allocated to cost centres where each cost centre would derive an overhead recovery rate (typically overheads per direct labour)
Overheads would then be applied to units of output according to how many direct hours were worked on them
