Lecture 7- ABC costing Flashcards
What is the difference between ABC systems and absorption costing systems?
ABC systems are more accurate but also now expensive.
When was ABC developed?
ABC was developed in the 1980’s by RS Kaplan
What environments are ABC more appropriate for?
Environments…
- which are multi-product
- which share services and activities
- where fixed costs account for a greater element of the cost base
When might a firm not benefit from the use of ABC?
A firm that has a high proportion of volume related direct costs may find little benefit from the use of ABC as its benefit is greater where a firms non-volume overheads are higher
What is the four stage process for ABC systems?
1) Identify cost activities
2) Identify cost pools and allocate costs to them for every activity
3) Identify an appropriate cost driver for each activity
4) Allocate costs to cost objects
What are the 3 types of cost drivers?
1) Transaction Drivers
2) Duration Drivers
3) Intensity Drivers
What are transaction drivers?
Transaction drivers are easy to measure, cheap and identifiable. Examples include: number of purchase orders, number of inspections etc.
Conventional ABC assumes the cost is the same each time which cause accuracy issues
What are duration drivers?
Instead of measuring simple statistics, we measure the time taken to perform an activity, eg a sales order, an inspection
More accurate than transaction drivers, But there’s a trade-off with costs
What are intensity drivers?
Intensity drivers are a direct cost to our cost object. Examples include average labor rates.
Why has ABC failed to gain greater acceptance?
1) It’s more expensive, and more complex
2) it isn’t universally applicable
3) Time consuming to implement for the first time
4) can be difficult to select good cost drivers
