Activity Base Costing

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ACTIVITY BASED COSTING ➢ Cost attribution to cost units on the basis of benefits received from indirect activities e.g. ordering, setting up, and assuring quality. ➢ Most overhead cost can be analyzed between the following: ➢ A) Short term variable cost, that varies with the volume of production. ➢ B) Long term variable cost that do not vary with the volume of production, but do vary with a different measure of activity. ➢ Kaplan and cooper have suggested that long term variable overhead is related to complexity and diversity of production rather than simple volume of output. For example cost for support services such as setups, stock handling, expediting (progress chasing) and scheduling do not increase with the volume of output. They are fixed in the short term but they vary in the long term according to the range and complexity of product items manufactured. The more different products, or product variations, the more complex and more diverse those support activities become. ➢ The ABC approach is to relate overhead cost to the activities that cause or drive them to be incurred in the first place and to change subsequently. These activities are called cost drivers. ➢ COST DRIVERS AND COST POOLS ➢ a cost driver is an activity which generate cost ➢ a) For short term variable overhead cost, cost driver will be volume of activity, such as machine hours operated or direct labor hours. ➢ B)for long term variable overhead cost , cost driver will not be related to output volume , these cost are related to the transaction undertaken by the support departments where the cost are incurred. These transactions in the support departments are the appropriate cost drivers to use. ➢ MERITS OF ACTIVITY BASED COSTING ➢ PRODUCT COSTING IN PREFRENCE TO STOCK VALUATION ➢ a) ABC focuses attention on the nature of cost…...

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