MBA Accounting

Activity based costing is nothing new but it has been recently been catching up due to many who starting to perceive the inadequacy of using the normal traditional methods.

Append below is a listing of all articles pertaining to activity-based costing:

Principles of Activity-based costing

An overview approach of Activity-based costing 

Shortcomings/Limitations of the traditional based costing compared to Activity-based costing 

Factors and Steps/Procedures in the implementation of activity-based costing 

Types of Activity Measures & Activity Cost Pool & Corresponding Activity Measures

Activity-based costing as a One-step attribution system compared to other traditional systems

Constraints/Limitations Of Activty-based costing

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Some managers or readers who are assigned to build up an activity based costing system might be at a loss on how to even embark on this assignment.

To do it, please look at the earlier articles on steps, conditions, factors,etc are provided.

In this article, the overview approach is given to implement the activity based costing procedure of a company:

1. First study the organization to identify all those activities which support production. Some of these support activities are inspection, setting up machineries, moving materials around the factory and purchasing materials. Note that support activities need not be single department. (more…)

As managers, we always try to relate the overheads costs by APPORTIONING to the various cost centres.

Remember that activity based costing is basically a ” one-step attribution system” as costs are NOT APPORTIONED between activities-the costs of each activity are RELATED DIRECTLY to products. Cost attribution is the process of relating cost to cost centres or cost units using cost allocation or cost apportion. (more…)

This article deals with some of the terms used in Activity-based costing.

In an Activity-based costing system(ABC), the term allocation base is replaced by the term activity measure, and the term cost driver is also used.

The two types of activity measures are :

• Transaction driver – a simple count of the number of times that an activity occurs. This is the least accurate type of activity measure. (more…)

Earlier, we have describe the shortcomings of traditional costing systems but do you know that activity based costing like all other systems too has it limitations or constraints.

As managers, we need to at least understand some of the following limitations of ABC:-

• Requires management to estimate costs of activity pools and to identify and measure cost drivers for these pools, (more…)

From part 1 and 2, we have understood some of the basic principles of activity based costing and the shortcomings of the activity based system.

Here, in this article, we look at some of the basic steps/procedurs to implement this activity-based costing:-

Before the implementation of ABC system, the following factors need to be considered:

• It’s implementation needs very strong top management support. Without leadership from top management, some managers may not see any reason to change. Without top management support, the ABC implementation will be seen as unimportant, (more…)

In the first part of the article, we understand the basic principles of activity-based costing.

This article deal with the differences between the traditional costing approaches versus activity based costing.

The differences are tabulated as follows: (more…)

Managers should be quite familiar with the two traditional costing systems namely absorption costing and marginal costing which are used to account or treat overhead costs.

However, neither system is able to provide satisfactory information about overheads costs for managers to use in runing a business. Earlier, we know that management accounting information is used by managers for helping them make decisions, for planning and control and for performance appraisal. (more…)