Lecture 5 Flashcards
Issues with machine hours as the only allocation base
-not always a good representation of the cost driver of all indirect costs
What is ABC
- focuses on individual activities as cost objects
- first allocates indirect costs to activity pools and then from the pools to individual products
ABC cost hierarchy
Categorises costs into different cost pools on the basis of the different types of cost driver
- Unit level
- batch level
- Product sustaining
- facility sustaining
Unit level costs
resources sacrificed on activities performed on each individual unit
Batch level costs
resources sacrificed on activities that are related to a group of units of products.
costs that depend on the number of batches processed
Product sustaining
resources sacrificed on activities undertaken to support individual products
facility sustaining
resources sacrificed on activities which support the organisation as a whole
Steps to using ABC
1 choose activity cost pools and an allocation base for each
2 assign indirect costs to the activity cost pool
3 calculate activity or allocation rates
4 assign direct costs and allocate indirect costs to each order
Differences in profitability in costing methods
under conventional costing all OH costs are allocated to products in proportion to their labour intensity base.
ABC assigns indirect costs based on the amount of activity each order requires
Who should use ABC
- produces very diverse products which dont consume resources in proportion to volume produced
- has a large proportion of costs that are indirect
- operates in highly competitive markets
Uses of ABC info
cost reduction
Better design decisions
better planning
