Cost Allocation under Traditional and Activity Based Costing system
- In traditional absorption costing overheads are first related to cost centres (Production & Service Centres) and then to cost objects, i.e., products. In ABC overheads are related to activities or grouped into cost pools.
- Then they are related to the cost objects, e.g., products. The two processes are, therefore, very similar, but the first stage is different as ABC uses activities instead of functional departments (cost centres).
- The problem with functional departments is that they tend to include a series of different activities, which incur a number of different costs that behave in different ways. Activities also tend to run across functions; for instance, procurement of materials often includes raising a requisition note in a manufacturing department or stores.
- It is not raised in the purchasing department where most procurement costs are incurred. Activity costs tend to behave in a similar way to each other i.e., they have the same cost driver. Therefore, ABC gives a more realistic picture of the way in which costs behave.
No comments:
Post a Comment