Literature Review On Activity Based Costing

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter sets a basic framework for the study by giving a general review on some theoretical and empirical literature and conceptual framework of the study. In doing the study, the study will strive to link the idea presented in this study with other related studies conducted on the late delivery of globally sourced goods in Tanzania and other parts of the world part to its application in the researched organization.

2.1 Theoretical review

2.1.1 Definition of terms

• Activity Based Costing- (ABC) is a costing system that has gained popularity in the last decade and the most written and talked about in management accounting since 1985 (Lere and Taylor, 2002).

Vieira, (2000) demonstrated that ABC uses two stages of a cost assignment approach. In the first stage, the resource costs are assigned to activities based on the amount of resources consumed in performing the activity. An activity cost would equal the sum of all the resources consumed in performing the activity. In the second stage, activity costs are traced to the frequency of the activity of the product of service is performed in support of the cost object.

ABC is a cost management method that addresses the shortcomings inherent in traditional costing methods for handling the indirect costs (Needy and Bopaya, 2000). ABC was originally developed by companies to deal with the problem of product cost subsidization in the traditional costing system.

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