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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
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
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.
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.