Chapter 8: activity based costing

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  1. Problems with conventional product costings
    • Growing automation: has increased MOH relative to direct labour. More machines means more non-volume-driven OH costs such as depreciation, insurance, set ups. 
    • Greater product diversity: has increased production complexity, which has led to increased demand for MOH support such as production scheduling, material handling and production set ups.
    • More investment in downstream areas such as customer service and marketing
  2. Traditional approaches likely to result in inaccurate product costs when
    • Proportion of DL cost decreases
    • Proportion of MOH cost increases
    • Proportion of MOH costs not related directly to production volume increases
    • Non-manufacturing costs that are product related become substantial
    • Product diversity increases
  3. Bill of activities
    A report identifying the activities, the cost per unit of activity driver, the quantity of activity drivers consumed and therefore, the cost of activities consumed by a product.
  4. Limitations of ABC
    • Facility level costs: may bear no obvious relationship to products. The higher the proportion of allocated facility costs, the greater the arbitrary element of the product costs
    • Use of average costs:
    • Complexity: if company is changing rapidly, data for ABC must be updated frequently.

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kirstenp
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Chapter 8: activity based costing
Updated:
2017-06-11 07:53:47
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Chapter 8: activity based costing
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