Activity Based Costing and the Theory of Constraints Are, Respectively, Overhead Absorption Costing and Marginal Costing in a Different Guise

2432 WordsNov 14, 200810 Pages
BRUNEL BUSINESS SCHOOL COVERSHEET FOR ONLINE COURSEWORK SUBMISSIONS Module Code MG2134 Module Title Management Accounting Module leader Tony Tollington Student ID number 0617484 Degree Programme (e.g. Business and Management (General)) Business Management and Accounting I understand that the School does not tolerate plagiarism. Plagiarism is the knowing or reckless presentation of another person’s thoughts, writings, inventions, as one’s own. It includes the incorporation of another person’s work from published or unpublished sources, without indicating that the material is derived from those sources. It includes the use of material obtained from the internet. (Senate Regulations 6.46) By completing the…show more content…
One of the main distinctions of ABC from overhead absorption costing is that overheads are accumulated to each separate activity, rather than the department, so called cost centres. In ABC this represents activity cost centre. Furthermore in ABC each different each activity cost centre has its own, suitable allocation base, and than is directly absorbed to cost object, so they are not absorbed in mainstream departments, like in traditional costing systems. Another distinction of ABC is that service support costs are assigned to a separate support activity centre, where separate cost driver rates are established and than portioned directly to cost objects, whereas in traditional cost systems, support costs are assigned to production cost centres and than allocated to cost objects, therefore they are absorbed within production cost centre. Overall ABC gives more detailed view of true resource consumption and links activities costs directly with manufacturing overheads and prime costs. Moreover ABC method helps organisations in cost control, as some activities cost may vary directly with production level; however they have different allocation bases. Where in traditional absorption costing these activities are not regarded as volume related, and are assigned with other fixed costs. This is where ABC is better method as it concentrates on identifying each factor that derives cost.

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