Question

Some costs are difficult to assign through this method of cost accounting. Indirect costs, such as management and office staff salaries are sometimes difficult to assign to a particular product produced. For this reason, this method has found its niche in the manufacturing sector.

Research the Internet and discuss Activity Based Costing.

Explain what it is and how it differs from Job costing.

Explain why “true” product costs have only a minor importance in final market price determination.

Define and give an example of a “cost object”, “activity” and “resources.”

Define “cost driver” and give 4 examples of activity cost pools and an appropriate cost driver for each.

Answer 1

Activity based costing:

This is a type of costing which identifies the different activities in an organization and assigns the cost which is directly proportional to the consumption of each.

Example let us take considering to manufacture a pen which involves the following step:

• Need to ascertain which activities are needed to create a product
• Separate activities into its own cost pool
• Assign cost drivers to each cost pool.
• Divide the total overheads in cost pool by the total cost drivers
• Calculate activity used and multiply it by the cost driver rate

Benefits of ABC costing

It gives the accurate product cost

Helps to eliminate unnecessary cost

Helps in decision making

cost control

Job costing: This is nothing but accumulating separate cost for each job. cost here includes material, labour and overhead.

Cost object: Describes something where cost are assigned. Example are service or product

Activity:Performing a task or program. Example:Involving in preparation of budgets.

Resources :This can be men material or labour which is used to perform an activity

Cost driver: Cost driver is an driving factor which causes change in cost of activity.

Examples

ACTIVITY COST POOL	COST DRIVER
Supervision department	Number of hours with respect to labour
Purchasing department	Number of purchase orders
Machine expenses	Number of hours run by machine
Setup	Number of machine setup required