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Activity Based Costing

Activity based costing (ABC) is an accounting methodology that assigns costs to activities rather than products or services. This enables resources and overhead costs to be more accurately assigned to the products and services that consume them. ABC focuses on activities as the basis for determining costs, and identifies appropriate cost drivers to trace overhead to products. While conventional accounting uses one cost driver, ABC uses multiple cost drivers, allowing for a more precise allocation of overhead costs. For these reasons, ABC systems are generally more accurate than traditional costing systems.

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81 views3 pages

Activity Based Costing

Activity based costing (ABC) is an accounting methodology that assigns costs to activities rather than products or services. This enables resources and overhead costs to be more accurately assigned to the products and services that consume them. ABC focuses on activities as the basis for determining costs, and identifies appropriate cost drivers to trace overhead to products. While conventional accounting uses one cost driver, ABC uses multiple cost drivers, allowing for a more precise allocation of overhead costs. For these reasons, ABC systems are generally more accurate than traditional costing systems.

Uploaded by

Emman Tariq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Activity based costing (ABC)

Introduction;
Activity based costing (ABC) method was developed in the United States. Robert Kaplan is
regarded as the founder of the theoretical principles of activity based costing within the cost
management knowledge area.
Definition;
ABC accounting stand for Activity based costing (ABC).it is an accounting methodology that assigns costs
to activities rather than products or services. This enables resources and overhead costs to be more
accurately assigned to the products and the services that consume them.

‘ABC is a systematic, method of assigning the cost of activities of products, services, customers, or any
cost’

Features or Characteristics of Activity Based Costing;

ABC is a new term developed for determining the cost. The basic feature of ABC is its focus on activities.
It uses activities as the basis for determining the costs of products or services The features or
characteristics of Activity Based Costing are briefly explained below.

 The total cost is divided into two types i.e. fixed cost and variable cost which is necessary to
provide quality information to design a suitable cost system in a manufacturing concern.
 The proper distinction is made between the cost behavior patterns.
 The cost behavior patterns are volume related, diversity related, events related and time
related.
 The appropriate cost driver has to be identified for tracing the overhead to a product.
 The cost drivers dictate the cost behavior pattern

Cost pools
Cost pools is an accounting term that refers to groups of accounts serving to express the cost of goods
and service allocable within a business or manufacturing organization

Example
the cost of the maintenance department is accumulated in a cost pool and then allocated to those
departments using its services.
Cost driver
A cost driver triggers a change in the cost of an activity. The concept is most commonly used to assign
overhead costs to the number of produced units

Example,
if you are to determine the amount of electricity consumed in a particular period, the number of units
consumed determines the total bill for electricity.

Conventional Accounting System


Conventional Accounting System is a traditional method of recording Accounting information.

Example
Indian system of accounting is the example of conventional accounting system

Difference between Conventional Accounting System and ABC


the traditional method (using one cost driver) and the ABC method (using multiple cost drivers) is more
complex than simply the number of cost drivers. When direct labor is a large portion of the product cost,
the overhead costs tend to be consistently driven by one cost driver, which is typically direct labor or
machine hours; the traditional method appropriately allocates those costs. When technology is a large
portion of the product cost, the overhead costs tend to be driven by multiple drivers, so using multiple
cost drivers in the ABC method allows for a more precise allocation of overhead

Why the Activity based costing systems are more accurate than traditional costing systems?

Activity based costing systems are more accurate than traditional costing systems. This is because they
provide a more precise breakdown of indirect costs. However, ABC systems are more complex and more
costly to implement. The leap from traditional costing to activity based costing is difficult

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