Page 243 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II Gopika Juneja, Lovely Professional University

Notes Unit 13: Activity-based Costing

CONTENTS
Objectives
Introduction

13.1 Limitations of Traditional Costing System
13.2 Activity-based Costing – An Overview
13.2.1 Objectives of Activity-based Costing

13.3 Working of Activity-based Costing
13.3.1 Limitations of Activity-based Costing
13.4 Activity-based Budgeting
13.4.1 Activity-based Management
13.4.2 Difference between Activity-based Costing and Activity-based Management

13.5 Activity-based Accounting
13.6 Summary
13.7 Keywords

13.8 Review Questions
13.9 Further Readings

Objectives

After studying this unit, you will be able to:
 Discuss the limitations of traditional costing system;
 Explain the concept of activity-based costing including its features, benefits and limitations;

 Explain concepts like activity-based budgeting;
 Differentiate between activity-based management and activity-based accounting.

Introduction

The main objective of any costing system is to determine scientifically the cost of a product or
service. For facilitating the calculation, costs are divided into direct and indirect. Direct costs are
the costs which are traceable to the products/services offered. On the other hand, indirect costs
which are also called as ‘overheads’ are not traceable to the products/services. Hence these costs
are first identified, classified, allocated, apportioned wherever allocation is not possible,
reapportioned and finally absorbed in the products/services. Charging the direct costs to the
products is comparatively a simple procedure and can be done with remarkable accuracy.
However, the indirect costs present problems in charging them to the products and there is a
possibility of distortion of costs though the basis of charging them is quite logical. This is one of
the limitations of the traditional costing system. For example, one of the methods of absorption
of overheads is direct labour cost and this method is quite satisfactory when the overhead costs

238 LOVELY PROFESSIONAL UNIVERSITY