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Activity-based costing tries to take the nonuniformity of resource consumption across products into account in the assignment of costs.
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What are the fundamental differences between the traditional absorption costing systems and the activity based costing systems?
Traditional absorption costing systems allocate manufacturing overhead to products based on a single volume-based measure, such as direct labor hours or machine hours, often leading to cost distortions. In contrast, activity-based costing (ABC) identifies and assigns costs to specific activities that drive overhead, using multiple cost drivers to reflect the true resource consumption of products. This results in more accurate product costing, enabling better pricing, profitability analysis, and decision-making. Ultimately, ABC provides insights into the cost structure that traditional methods may overlook.
How do traditional cost assignment systems assign direct costs?
Traditional cost assignment systems typically would assign directly to the cost objects the costs of those resource consumptions that can be economically traced directly to units of output requiring the resources.
What is one disadvantage of traditional cost assignment systems?
high-volume, relatively simple product will end up overcosted and subsidizing a subsequently undercosted, low-volume, relatively complex product, resulting in inaccurate unit costing and suboptimal product-line pricing decisions
What factors contributed to the emergence of activity based costing in the 1980s?
The Traditional costing system used to allocate/assign overhead costs to products by using only volume based cost drivers. In fact, these traditional systems were designed decades ago when most companies manufactured a narrow range of products, and direct labour and materials were the dominant factory costs. Overheads costs were relatively small and the distortions arising from inappropriate overhead allocations were not significant. Danish Ayub
Where are cost accounting systems used?
Cost accounting systems such as activity-based costing (ABC) systems are used primarily in manufacturing environments, but increasingly are being applied to service companies, such as banks, real estate firms, and insurance companies.
Who develop activity based costing?
Activity-based management and activity-based costing (ABM/ABC) have brought about radical change in cost management systems. ABM has grown largely out of the work of the Texas-based Consortium for Advanced Manufacturing-International (CAM-I). No longer is ABM's applicability limited to manufacturing organisations. The principles and philosophies of activity-based thinking apply equally to service companies, government agencies and process industries. The acronym itself has evolved from ABC to ABCM (activity-based cost management) to ABM, and the application of ABC evolved from a manufacturing product costing orientation to a management philosophy of activity management applied in industries and organisations other than manufacturing.
Does the activity-based costing systems combine many various elements of overhead into a single cost pool?
No, activity-based costing (ABC) systems do not combine various elements of overhead into a single cost pool. Instead, ABC allocates overhead costs to specific activities based on their actual consumption of resources. This approach allows for a more accurate representation of costs by assigning overhead to multiple cost pools that correspond to different activities, enabling better decision-making and cost management.
What are the two basic types of costing systems?
The two basic types of costing systems are job order costing and process costing. Job order costing is used when products are made based on specific customer orders, allowing for tracking costs for each individual job. In contrast, process costing is applied in industries where production is continuous and units are indistinguishable, allocating costs to processes or departments over a specific period. Each system serves different manufacturing environments and provides insights into cost control and pricing strategies.
What are the advantages and disadvantages of a recipe costing software?
An advantage to having recipe costing software is the fact that businesses will know exactly how much it cost to produce their food. One disadvantage to recipe costing systems is the fact that they can be costly.
What are the advantages and disadvantages of a recipe costing software program?
An advantage to having recipe costing software is the fact that businesses will know exactly how much it cost to produce their food. One disadvantage to recipe costing systems is the fact that they can be costly.
Define functional based cost management systems?
Functional-based costing considers total expenses incurred at all levels. Functional-based cost budgets for departments, for example, will include costs incurred by every activity performed in that department. In functional-based costing, accountants assign fixed costs such as manufacturing overhead to output on a per-unit basis.
Can a company use both job-order and process costing systems?
Yeh totally no doubt
