Question

Activity based costing was introduced as an alternative to absorption costing.

1. Discuss using illustration the advantages and disadvantages of Activity based costing.

Clearly citing references uses.

Answer 1

Answer:

Movement/Activity based costing and customary assimilation/Absorption costing are the two distinct methodologies utilized for distributing aberrant costs (overheads) to items.

Both the techniques include estimation of generation overhead expenses and task of those expenses to items dependent on a pre-decided rate. Be that as it may, they contrast as far as precision and intricacy.

Conventional costing is less complex and uses just a single overhead cost pool, into which all aberrant manufacturing plant costs are collected. (Indeed, even where departmental rates are utilized, there would be just a single aberrant cost pool for an office). The all out cost identified with a cost pool, is then relegated to singular items dependent on a pre-decided overhead rate utilizing a solitary action measure like direct work hours, machine hours, and so forth.

Such a rate is a normal rate and does not precisely relegate overhead expenses, as the overhead expenses might be the consequence of more than one action every movement cost requiring an alternate assignment base.

ABC looks to expel this disadvantage of expansive averaging of overhead expenses related with conventional retention costing. For this, it first tries to follow every thing of overhead expense to the individual movement that caused it, which will result in the arrangement of a couple of action cost pools for circuitous expenses. Expenses are then aggregated under each cost pool and afterward appointed to items based on a movement rate. The action rate for a cost pool is controlled by partitioning the complete expense under the cost pool by the movement unit which drives the expense under the action.

For instance, complete set up expenses can be partitioned by number of set-ups to acquire a cost rate for set-up.

This rate is then connected to items based on number of set-ups identified with the item. Comparable cost pools are expenses of assessment/testing, cost of material development, cost of acquiring and so on. Accordingly, however increasingly perplexing, ABC gives better costing and better basic leadership.

Advantages of ABC:

More noteworthy precision in costing of products.is the essential advantage of action based costing.

1. Better cost detailing for basic leadership.

2. Better comprehension of overhead expenses.

3. Avoids dispensing immaterial expenses to an item.

Dis advantages of ABC :

1. Is exorbitant to keep up and henceforth may not be moderate to private company.

2. If utilized by people new to the framework, it tends to be effectively confused.

3. Is mind boggling and hard to decipher.