Page 247 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes

Note Activity-based Costing is based on the belief that activities cause costs and therefore
a link should be established between activities and product. The cost drivers, thus, are the
link between the activities and the cost.

 Identification of costs with the products: The final stage in Activity-based Costing is to
identify the cost with the final products which can also be called as cost objects. Cost
objects include, products, services, customers, projects and contracts. As mentioned earlier,
direct costs can be identified easily with the products but the indirect costs can be linked
with the products by identifying activities and cost drivers. Thus Activity-based Costing
is the process of tracing costs first from resources to activities and then from activities to
specific products.
It can be concluded that the Activity-based Costing is a costing system which tries to charge the
indirect costs to the products and services fairly accurately. However for effective implementation
there is a need of involvement of the staff and their training on continuous basis.
Similarly there is a need to review the working of the system at periodic intervals and keep a
follow up of the feedback received. These actions will ensure effective implementation of the
system. Support of top management is also required for effective implementation of this system.
Activity-based costing system is definitely a better system but much depends on the
implementation of the same.

13.3.1 Limitations of Activity-based Costing

Though this system is quite effective, it suffers from some limitations. These limitations are
given below:
 Activity-based Costing is a complex system and requires lot of records and tedious
calculations.
 For small organisations, traditional cost accounting system may be more beneficial than
Activity-based Costing due to the simplicity of operation of the former.

 Sometimes it is difficult to attribute costs to single activities as some costs support several
activities.
 There is a need of trained professionals who are limited in number.

 This system will be successful if there is a total support from the top management.
 Substantial investment of time and money is required for the implementation of this
system.

Self Assessment

State whether the following statements are true or false:

7. Activity-based Costing is the process of tracing costs first from resources to activities and
then from activities to specific products.
8. Cost pool is any factor which causes a change in the cost of an activity.

9. Cost driver is defined by CIMA as, ‘the point of focus for the costs relating to a particular
activity in an activity-based costing system’.

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