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Activity Based Costing (ABC) is said to provide not only a basis for calculating more accurate product costs but also be a mechanism for managing costs. Throughout this essay I aim to explain why ABC is a more accurate method of costing and how this sophisticated system makes it extremely easy to manage costs. ... It was believed that accounting systems were grossly underestimating the cost of low-volume products and overestimating the cost of high-volume products.
ABC was introduced as a mechanism to more accurate product costing. Few management accounting developments have stimulated the degree of interest that ABC has engendered. ...
“It provides designers of costing systems new ways to cost products and services modify behaviour and focus management attention on matters of strategic importance”
ABC is a conventional four-stage process that assigns overhead costs to product services, jobs, projects or other cost objects. ... The design of an ABC system involves the following stages:
• Identifying the major activities that take lace in an organisation
• Assigning costs to cost pool/centres for each activity
• Determine the cost driver for each major activity
• Assigning the cost of activities to products according to each product’s demand for activities
Initially, there may be a large amount of work involved in analysing and researching product and overhead costs to ensure that ABC will be effective. ...
Reason’s that ABC is more accurate
ABC is a basis for calculating more accurate product costs as there is great emphasis on the need to obtain a better understanding of the behaviour of overhead costs, how they relate to the product and what causes the expenditure.
ABC calculates a truer product cost by determining the factors that influence the cost of a particular activity and charging only the overhead it actually consumed to that product.
Approximate Word count = 1381
Approximate Pages = 5.5
(250 words per page double spaced)
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