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Activity Based Costing (What is activity based costing? (Advanced costing…
Activity Based Costing
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Reasons for development
- Overheads are now the most dominant cost in modern manufacturing
- Prices need to be more accurate than before due to higher levels of competition.
- More products are now produced therefore manufacturing has to be more efficient.
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Allocating Overheads
- Identify activities and group manufacturing overheads into these activities
- Determine the cost driver for each activity
- Assign the costs of activities into the product on the basis of cost drivers
- Assign costs to cost centres for each activity. Costs should be both direct and indirect.
Points to remember
- Use normal or budgeted activity to calculate overhead absorption rate
- Under/over recovery of overhead arises only with fixed overheads and when an absorption costing system is used.
- Do not include non-manufacturing overheads in the inventory valuations for both absorption or marginal costing.