The latest methodology in cost accounting is activity based costing. Under this method, the expenditures related to the production activities are calculated first and then product expenses are found out. The emphasis of activity based costing is towards product manufacture.
In conventional costing method, there is no proper system of cost assignment. The decision lies under a company’s cost accountant who makes his decision on appropriate grounds for cost assignment. If the so called precise costing information which is provided through the conventional costing method are used, the steps used for regulating and controlling sell price of a commodity may be based on an incorrect decision.
In the production operation, the rising necessity of indirect costs is commenced on activity based costing. With the introduction of various upgraded machineries, direct processing costs are downgraded at the backdrop which is much easier to handle than indirect cost which is mostly preferred in various industrial sector.
The weight of indirect processing costs is heavier than direct processing costs in the present financial situation, which is seen exceeding production costing method. Still, many industries do not like applying indirect costs which are termed as cost information made ready using past years data. Many organisations find this method to be difficult and complicated.
Currently, many industries use upgraded manufacturing technology for cost assignment as conventional costing system is seen unsuitable for many present hi-tech organisations.
According to the terminology set by CIMA (Chartered Institute of Management Accountants), activity based costing is defined as cost criteria to cost units which are based on advantages acquired from indirect activities.
Concept of Activity Based Costing
In this present financial times, every industry can compete with each other by using effective activity based costing. A company needs to control its market worth and also its value chain at various phases. It needs to make a comparative study of total value at every stage with the cost related to it.
Decisions are to be taken for execution only after correct comparison report is made. When such decisions are taken, it helps industries to understand what are important and non-essential activities. Then they can remove the needless activities and include new activities. Activity based costing enhances the decision quality of management by contributing precise cost information.
Execution of Activity Based Costing
There are 5 necessary steps of activity based costing which when applied can provide appropriate results.
Functional Area of a Corporation
Cost Drivers inActivity Based Costing
Factors to be taken into account before cost driver selection
There are two major factors that need to be focused on an organisation regarding cost driver.
Classification of Activities
Activities are recognised and are diversified into various categories or phases under the process involved in the production. Generally, activities are categorised into 4 divisions.
Advantages of administering Activity Based Costing
There are few essential advantages of administering activity based costing which are stated as follows.
Every cost activity can be precisely resoluted in assistance to activity based costing. The operation of transference and transferred departments can be assessed by the manager of a company with the help of it.