Activity Based Cost Analysis

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Activity Based Costing is defined by CIMA, “As an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs.”
The best way to understand this is perhaps by going through the various steps of ABC first which are as follows:
1. Identifying costs – The first and the most important step, it involves identifying the activity for which the costs are meant to allocated or found. It helps in realizing the necessary elements for the process and the cost associated with it.
2. Loading Cost Pools –
(i) Secondary Cost …show more content…

With passage of time, its applications has reached to service industry amongst others. From a costing system ABC has evolved into performance measurement solution including process analysis tools. Although a number of alternatives like lean accounting have come up in the past few years due to certain limitations of ABC.
Uses:
• Distribution Cost: Distribution constitutes as a major overhead cost for most companies, ABC analysis helps in finding of unprofitable distribution channels and various costs involved in the others.
• Make or buy: As a result of the detailed cost analysis that can be obtained from ABC for the in-house manufacturing of the product make or buy decisions can be taken
• Pricing: The detailed cost analysis from ABC can be used to understand the minimum cost of the product to price it accordingly. Another aspect with which ABC helps is understanding the necessary overhead costs to be included in the minimum pricing of the product/service.
• Profitability partnerships: It has been observed that certain overheads like relationship costs are abnormally high for some customers, vendors or suppliers. ABC helps is sorting out these unprofitable partnerships to focus on fruitful profitable partnerships with vendors, suppliers and …show more content…

ABC traces costs by using resource and activity cost drivers that reveal activities and objects consumption patterns on the basis of a cause and effect relationship. Cost drivers are used to establish a relationship between resources, activities and cost objects. One of the most difficult part in ABC is the identification and selection of these cost drivers. One of the major difficulties that the people in the industry feel is related to data collection, identification of activities and lack of resources. To deal with problem of lack of data three levels of accuracy is

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