Activity Based Costing

Satisfactory Essays
Chapter 8

Activity-based costing

Problems with conventional product costing systems

General features of conventional product costing systems

Direct material and direct labour costs are traced to products

Manufacturing overhead costs are allocated to products using a predetermined overhead rate

Manufacturing overhead rate is calculated using some measure of production volume

Non-manufacturing costs are not assigned to products

Problems with conventional product costing systems

Failure to adapt to the changing business environment

Increasing levels of non-volume-driven manufacturing overhead costs

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Depends on the purpose of the system, which depends on the needs of management

A decision to include activity-based management in an ABC system will influence the range of costs included in the system, as well as the type of cost drivers identified

Activity-based hierarchy of costs and activities

Unit level activities

Performed for each batch of product

Batch level activities

Performed for each batch of product

Product level (or product-sustaining) activities

Performed for specific products or product families

Facility level (or facility-sustaining) activities

Not usually included in product costs

Activity-based versus conventional product costs

Conventional product costing assumes product costs are driven by volume-based cost drivers

Conventional costing ignores batch size

Units produced in large batches consume a relatively low consumption per unit of batch costs

ABC may include
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