Activity Based Costing (2) Flashcards
What is activity based costing?
Method of costing which involves identifying costs of main support activities and factors that drive the costs of each activity
How are support overheads charged in activity based costing?
By absorbing cost on the basis of the product’s usage of the factor driving the overheads
Ideas behind ABC?
Activities cause costs
Manufacturing products creates demand for support activities
Costs assigned to a product on basis of product’s consumption of these activities
What is a cost driver?
A factor that has most influence on the cost of an activity
Cost driver for production set-up costs overhead?
Number of production set-ups
Cost driver for machine oil and machine repairs overhead?
Number of machine hours
Cost driver for supervisor salary overhead?
Number of labour hours
Cost driver for Ordering costs: Handling customer orders overhead?
Number of orders
Cost driver for Materials handling costs overhead?
Number of production runs
What is the purpose of ABC?
To act as an extension of absorption costing by identifying what cost drivers are
1st step in ABC?
identify an organisation’s major activities that support manufacture of organisation’s products or provision of its services
2nd step in ABC?
Group overheads into activities, according to how they are driven
3rd step in ABC?
Identify cost drivers for each activity
4th step in ABC?
Calculate a cost per unit of cost driver
5th step in ABC?
Absorb activity costs into production based on usage of cost drivers
