Activity Based Costi

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capabilities and limitations of ICT

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by Gwen Grubb

Activity Based Costing

ABC is where cost is attributed to cost unit based on the cost unit usage of activity

Implication

Decision making

Product change

Discontinuation

Promotion

Pricing

Why ABC

high volume product will tend to bear higher overheads in trad.

many cost are driven by non volume related act.complexity/range

overhead constitute large part of cost than dl dm

Wider range of products

Disadvantages

a cost sriver may/may not explain all cost in c/pool

some item may use other means of appn like rent,depn etc

problematic implementn

cost benefits of accuracy

only measurable cost drives can be used

The method

Step 4: CHARGE to cost units based on their usage of the activity

Step3: For each cost driver cost pools

Step 2: Cost drivers ( factors which determine the cost of activity)

Step 1Major activity

example:purchasing acti, prodn etc

Advantages

more ohd cost beyond factory floor

better costing of pdt with complex prodn process

better u/std what drives ohd costs

Subtopic

Definition: ?

"activities go up cost go up''

products demand activites

activities drives cost