![]() ![]() This may not accurately reflect the actual cost of the product or services. In traditional costing, costs are assigned based on arbitrary assumptions or in averages. Costs are assigned based on activities and cost drivers The labor, material and equipment for the production of a car is different from labor material and equipment for the production of a motorbike hence the cost assignment is different. This principle suggests that different products or services require or consume resources in different ways. Different Products and Services consume resources differently assigning the costs of resources to the specific activities that consume them.įor instance, production of a car consumes the amount of labor, material and equipment. Through this recognition, ABC methods aim to effectively and accurately allocate costs i.e. Kaplan and Robin Cooper in their book, “Cost and Effect: Using Integrated Cost Systems to Drive Profitability and Performance” Basic Principles of Activity Based Accounting (ABC) Methods Activities Consume ResourcesĪBC method states that the resources consumed in the production of a product or service are determined by the activities involved or required to produce the product or service. Hence, ABC simplifies the overhead and indirect costs to products or services.Īctivity Based Costing was popularized by Robert S. Simply generalizing the overhead and indirect costs may not reflect the accurate cost. Some parts or products may require more set up time, other parts or products may require more time in testing. In real case scenarios, overhead costs or indirect costs are incurred differently by different products based on their nature. all the overhead costs are assigned on average. Traditional methods of costing assume that all the products consume overhead resources in the same way i.e. In more technical terms, Activity Based Costing methods is a method of assigning overhead and indirect costs to products and services. The main focus of this costing method is to identify and analyze the activities and cost drivers that contribute to the production and then to assign costs to those activities based on their usage. Disadvantages of Activity Based Costing Method IntroductionĪctivity Based Costing (ABC) is a costing method in accounting that focuses on different activities and resources that are essential to produce a product or service.Better alignment of costs and activities.Advantages of Activity Based Costing Method.Accurate cost information is essential for decision making.Costs are assigned based on activities and cost drivers.Different Products and Services consume resources differently.Basic Principles of Activity Based Accounting (ABC) Methods.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |