3.1 Introduction
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Myo Naing3.1 Introduction
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Myo NaingFor Exams from September 2024 to June 2025 – (PM) Performance Management
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3.1 Introduction
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Activity-based costing (ABC) – an approach to the costing and
monitoring of activities which involves tracing resource
consumption and costing final outputs. Resources are assigned Continue
to activities and activities to cost objects. The latter use cost
drivers to attach activity costs to outputs. Category
– Chartered Institute of Management Accountants (CIMA) Official
2.3 Activity-Based Costing
Terminology 2005
Traditional absorption costing uses one method of apportioning all
overhead costs between products, typically labour hours or
machine hours. This "blanket rate" means that product costs may
not accurately reflect the true product overhead costs.
When overhead costs accounted for only a small portion of total
factory costs, this inaccuracy was not significant. However, in
modern factories and service industries, due to the reduction in the
amount of labour used and the increase in the amount of high
technology, overhead costs are often a significant portion of overall
product costs. The inaccuracy of absorption costing is no longer
insignificant.
Activity-based costing aims to identify the activities that cause
overhead costs to be incurred and to apportion the overhead costs
to each product based on the use of the activities by each product.
ABC recognises that traditional ideas of fixed and variable cost
categorisations may not be appropriate and that, as the proportion
of overhead costs in manufacturing has increased, there is a need
for a more accurate method of absorbing these costs into cost
units.
It looks for a clearer picture of cost behaviour and a better
understanding of what determines the level of costs (i.e. "cost
drivers").
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