Page 254 - DCOM206_COST_ACCOUNTING_II

Unit 13: Activity-based Costing

 In order to overcome the limitations of traditional costing systems Activity-based Costing Notes
has been introduced.

 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.’
 A budget is a statement expressed in quantitative/monetary/both terms prepared prior
to a defined period of time for the policy to be pursued during that period for the purpose
of achieving a given objective.
 The Activity-based budgeting is different from the traditional budgeting in the sense that
it provides a strong link between the objectives of organisation and objectives of a particular
activity.

 The Activity-based management is a tool of management that involves analysing and
costing activities with the goal of improving efficiency and effectiveness. Though it is
closely related to the Activity-based Costing, still it differs from the same in its primary
goal.

13.7 Keywords

Activity Analysis: Activity analysis identifies value added and non-value added activities.
Activity-based Accounting: It is a broader term which involves in, ‘collection, recording, analysis,
controlling and reporting of activity related costs rather than departmental or cost centres
related costs.’
Activity-based Costing: It is the collection of financial and operational performance information
tracing the significant activities of the firm to product costs.

Activity-based Management: It is a tool of management that involves analysing and costing
activities with the goal of improving efficiency and effectiveness.
Budget: It is a statement expressed in quantitative/monetary/both terms prepared prior to a
defined period of time.
Cost Driver: It is any factor which causes a change in the cost of an activity, e.g. the quality of
parts received by an activity is a determining factor in the work required by that activity and
therefore affects the resources required.
Cost Pool: It is defined by CIMA as, ‘the point of focus for the costs relating to a particular
activity in an activity-based costing system.’
Performance Analysis: Performance analysis involves the identification of appropriate measures
to report the performance of activity centres or other organisational units consistent with each
unit’s goals and objectives.

13.8 Review Questions

1. What is activity-based Costing? Why is it needed?

2. What is a ‘Cost Driver’? What is the role of cost driver in tracing cost to products?
3. Discuss the steps in applying activity-based costing in a manufacturing company.
4. How are activities grouped in a manufacturing company?

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