Activity Based Costing Flashcards
What are Cost Pools
They are groups of overheads that are caused by the same activity.
What are cost drivers?
They are activities that influence the level of costs
Example of cost driver for each batch of goods?
Number of machine set-ups
Number of quality inspections
Number of production runs
What does attribution mean?
It means relating overheads to units of output.
What does activity based costing mean?
It means that overheads are attributed to output on the basis of relevant activities
What is activity based costing an alternative to?
Absorption costing
What must cost drivers be linked to?
They must be linked to the way which the business is conducted
What is absorption costing not suitable for?
Modern production methods where there is a high level of automation and overheads are a large proportion of total costs
How to calculate full unit cost
Add the overheads to the direct costs, add required mark-up
What are the benefits of ABC compared to Marginal costing
Full cost recover
Lower mark-up
ABC accepted under international accounting standard
Benefits of ABC compared with absorption costing
Accurate unit cost = accurate selling prices
Allows management to understand how to control cost
More accurate than absorption costing for capital intensive biz
Limitations of ABC
Not all expenses can be related to cost drivers
Time-consuming due to record keeping
Can a single cost driver explain cost behaviour of activity
