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Meaning
Activity-Based Costing is a methodology that assigns resources to activities, and activities to cost objects based on a cause-and-effect relationship. ABC is that costing in which costs are first traced to activities and then to the products. It is a costing system which focuses on activities performed to produce products. Activities are responsible for incurrence of Costs.
Provide Quality of information to design a cost system. Distinction between cost behavior patterns which are volume, diversity, events & time. Cost driver need to be identified
Identify activities Determine cost for each activity Determine cost drivers Collect activity data Calculate product cost
abc
absorption
costing
1. Overheads are first related to the 1. Overheads are first related to the activities or grouped into cost pools. various production and service departments. 2. Activity cost drivers can be used to 2. Overhead rates are used determine the cost of the cost objects. ascertain cost of products only. to
3. It portrays more realistic cost 3. Since the overheads are related to the behavior since the overheads are cost centre, a realistic picture of the related to the cost drivers. cost behavior is not portrayed 4. All levels of activities in the 4. Only two levels of activity, i.e. facility manufacturing cost hierarchy i.e. unit level and level are identified. level, batch level, product level and facility level are identified.