S1 - activity based costing Flashcards
what is activity based costing
aim to accumulate costs by organisational activity and allocate the costs to the product causing the activity
Identify activities
Assign costs
Indirect costs require the calculating of the total cost of each activity over the financial period - cost pool
Identify a cost driver
Calculate a cost driver rate
Assign part of the cost of each activity to different products based on the extent to which each product has caused the activity to occur
what are the activities in abc
combine related activities into one centre to reduce the amount of detailed recording
Significant costs
Importance to output processes
Ability to identify single related cost driver
what are the four levels of activities
unit level - every time a unit is produced
Batch level - every time a batch is produced
Product level - needed for that particular product
Facility level - relating to the overall production
what are the benefits of abc
increases accuracy of product costing and selling prices
Useful for cost comparison purposes
Results in better product mix decisions
Can be applied to other costs such as marketing costs to ascertain profitability of a particular customer
Helps to focus more on cost consumption and what causes costs to be incurred - better cost management
Non value adding activities become more visible and can be reduced or eliminated
what are the limitations of abc
challenging to implement as it requires organisational wide buy in
Less useful in organisations with high levels of direct materials and labour and minimal overheads
Analysing processes and ascertaining activities as the basis for ABC is time consuming and arbitrary too
More costly to implement and run - separate calculations
Still uses arbitrary methods of cost allocation in selecting drivers and combining activities
which organisations would benefit from abc
differing products in terms of complexity, lot size, volume
Differing products in terms of various activities
Wider variety of products than when first set up
High proportion of overheads
Existing management do not rely on existing system due to inaccurate information
Technology used has changed since first set up
