Abc Costing

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"Activity-based costing systems yield more useful and accurate information than conventional costing systems because they use more cost drivers to assign support costs to products." Do you agree with this statement? Explain.

Yes, I agree with this statement. ABC costing systems are used over traditional methods to more accurately measure product/service costs.

What is activity-based costing?

ABC costing measures the resources used to produce a product or to provide a service. It uses actual direct material cost, actual direct labor cost, and both manufacturing and non-manufacturing overhead costs actually incurred to produce the product/service.

How does it differ from conventional costing methods?

•Non-manufacturing and manufacturing costs can be assigned to each individual activity / product / service, instead of an aggregate measure for several activities •Overhead costs can be allocated to each activity and can be based on the level of actual activity, rather than budgeted capacity •Allocation bases used differ from conventional based methods

Eg. Producing and distributing a car

Traditional CostingABC Costing
Employee pay$2,300Compute requirements$300
Purchasing costs$1,500Purchase parts & materials$1,500
Manufacturing costs$7,000Store parts & materials$800
Distribution costs$200Inspect parts & materials$1,000
Training$1000Manufacture car$5,000
Paint car$200
Clean car$100
Deliver car$100
Perform management$3,000
Total$12,000 Total$12,000

Why has ABC costing emerged as an alternative?

•To make use of the differences mentioned above
•Many companies produce a great variety of products and services which consumer different overhead resources •For many firms, direct labour is no longer an appropriate cost allocation base for overhead •Companies are marketing new products which differ in volume, batch size and complexity – therefore a standard cost rate...
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