CHAPTER 8 -ABC Flashcards
What is traditional product costing system?
a product costing system that traces direct material and direct labour to products, and allocates manufacturing overheads to products using a predetermined OH rate, which is usually based on a volume based cost driver.
Problems with Traditional Product Costing systems
- non manufacturing costs are not assigned to products.
- failure to adapt to the changing business environment.
-causes of changes in cost structures, e.g. growing automation, greater product diversity, more investment in downstream areas.
Inaccurate products costs are likely when:
-the proportion of direct labour costs decrease.
- the proportion of manufacturing OH costs increase.
-the proportion of manufacturing overhead costs, not related directly to production volume increases.
-non manufacturing costs that are product related become substantial.
-product diversity increases.
Costing in service firms
-Service firms tend to use firm wide, volume based overhead rates.
- impact of increasing product diversity and quality on the level of non volume driven overhead costs.
ABC Costing view:
-Considers how ABC can be used to estimate the cost of cost objects.
- attempts to improve the allocation of manufacturing overhead to products.
ABC Activity management view:
- Assists management by identifying and analysing the characteristics of business activities.
Activity
A unit of work performed within the organisation.
Activity Driver
A cost driver used to estimate the cost of an activity consumed by the cost object.
Cost Driver
a factor or activity that causes a cost to be incurred.
Resource Driver
A cost driver used to estimate the cost of resources consumed by an activity.
Root cause cost driver
The underlying factors that cause activities to be performed and their costs to be incurred.
Cost vs Benefits of ABC
Costs - Complexity, requires a lot of information to set up.
Benefits - more accurate product costs, better decisions about product mix and pricing.
When to use aBC
-proportionally high OH costs.
-OH is not directly related to production volume.
-Diverse product range
-Product complexity.
-Inappropriate decisions have high costs attached.
- consider costs of implementaion
Impediments to introducing ABC
-Lack of awareness of ABC
-Uncertainity about the potential benefits to be gained.
-concern about extensive resources required to implement ABC.
-resistance to change from mangers and employees.
ABC in service organisations
More difficult to implement that in manufacturing:
-high levels of facility costs.
-Many activities are non repetitive
-difficult to identify service outputs
