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A.) Critically discuss the way (ABC) operates, referring to pools, drivers and activity hierarchy.
Definition
Activity based costing (ABC) is a cost accounting approach concerned with matching costs with activities (called cost drivers) that cause those costs. It is more sophisticated kind of absorption- costing and replaces labour based costing system. ABC states that (1) products consume activities, (2) it is the activities (and not the products), that consume resources, (3) activities are the costs drivers, and (4) that activities are not necessarily based on the volume of production. Instead of allocating costs to cost centres ( such as manufacturing, marketing, finance), ABC allocates direct and indirect costs to activities such as processing an order, attending to a customer complaint, or setting up a machine. A subset of activity based management (ABM), it enables management to better understand (A) how and where the firm makes a profit, (B) indicates where money is being spent and (C) which areas have the greatest potential for cost reduction.
The motivation to choose the ABC system is because it is too difficult to assign some cost like, indirect cost, management salaries and office staff salaries through Absorption costing. And this method (ABC) has found its niche in the manufacturing sector.
It can be applied to derive realistic costs in a complex business environment. It can be applied to all overhead costs, not just production overhead and also it can be used just as easily in service costing as in product costing.
Although it is apparent that ABC alleviates considerably many of the worst effects if the arbitrary product line cost allocations inherent in many conventional systems, it does not eliminate the mall.
Cost pool: some measure of cost apportionment may still be required at the stage of cost pooling. Overheads common to more than one cost pool (especially in the absence of specific resource metering) could include rent rates,
Definition
Activity based costing (ABC) is a cost accounting approach concerned with matching costs with activities (called cost drivers) that cause those costs. It is more sophisticated kind of absorption- costing and replaces labour based costing system. ABC states that (1) products consume activities, (2) it is the activities (and not the products), that consume resources, (3) activities are the costs drivers, and (4) that activities are not necessarily based on the volume of production. Instead of allocating costs to cost centres ( such as manufacturing, marketing, finance), ABC allocates direct and indirect costs to activities such as processing an order, attending to a customer complaint, or setting up a machine. A subset of activity based management (ABM), it enables management to better understand (A) how and where the firm makes a profit, (B) indicates where money is being spent and (C) which areas have the greatest potential for cost reduction.
The motivation to choose the ABC system is because it is too difficult to assign some cost like, indirect cost, management salaries and office staff salaries through Absorption costing. And this method (ABC) has found its niche in the manufacturing sector.
It can be applied to derive realistic costs in a complex business environment. It can be applied to all overhead costs, not just production overhead and also it can be used just as easily in service costing as in product costing.
Although it is apparent that ABC alleviates considerably many of the worst effects if the arbitrary product line cost allocations inherent in many conventional systems, it does not eliminate the mall.
Cost pool: some measure of cost apportionment may still be required at the stage of cost pooling. Overheads common to more than one cost pool (especially in the absence of specific resource metering) could include rent rates,