Page 245 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes Self Assessment

Fill in the blanks:
1. …………………… costs are the costs which are traceable to the products/services offered.
2. In a …………………… costing system, overheads are allocated, apportioned and finally
absorbed in the cost units.
3. The limitation of traditional costing system is the division between …………………… as
there are many complications due to the complexity of the modern business.

13.2 Activity-based Costing – An Overview

CIMA defines Activity-based Costing as, ‘cost attribution to cost units on the basis of benefit
received from indirect activities e.g. ordering, setting up, assuring quality.’

One more definition of Activity-based Costing is, ‘the collection of financial and operational
performance information tracing the significant activities of the firm to product costs.’
The objectives of Activity-based Costing will be discussed in the subsequent sub section.

13.2.1 Objectives of Activity-based Costing

The objectives of Activity-based Costing are discussed below:

 To remove the distortions in computation of total costs as seen in the traditional costing
system and bring more accuracy in the computation of costs of products and services.

 To help in decision making by accurately computing the costs of products and services.
 To identify various activities in the production process and further identify the value
adding activities.

 To distribute overheads on the basis of activities.
 To focus on high cost activities.
 To identify the opportunities for improvement and reduction of costs.
 To eliminate non value adding activities.

Self Assessment

Fill in the blanks:

4. Activity-based costing is defined as the …………………… attribution to cost units on the
basis of benefit received from indirect activities e.g. ordering, setting up, assuring quality.
5. Activity-based costing is, ‘the collection of financial and …………………… performance
information tracing the significant activities of the firm to product costs.’
6. The objectives of …………………… is to remove the distortions in computation of total
costs as seen in the traditional costing system and bring more accuracy in the computation
of costs of products and services.

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