Learning Materials For Accounting, Management , Finance And Economics.

Wednesday, July 6, 2011

Concept And Meaning Of Activity Based Costing (ABC)

The traditional system of costing suffers from certain limitations. It fails to precisely assign the overhead costs into product units. Therefore activity-based costing system has recently been developed to overcome the limitations of traditional costing system. The activity costing system is based on premise that activities make a product.

Activity- based costing (ABC) is the determination of product cost based on the activity needed for producing a product. The activities required to produce a product or render service consume a cost. Therefore, an insight into the expenses consumed by all those activities performed for the manufacturing of finished products and sale is very important. A number of researched studies have shown the increasing utility of activity-based costing on overheads allocation and apportionment for product cost determination.

Product cost determination under activity-based costing is made on the basis of cost driver required for producing goods or delivering services. Activity-based costing is becoming more effective in costing of multi-products produced by industries and executing customers' orders.

Activity-based costing (ABC) is an effective management approach for distributing and controlling the overhead costs. Overhead analysis can be made more accurate by using ABC techniques for a wide range of products, for product costing and profitability analysis and for distribution and control of the overheads appropriately.