1
Q
Characteristics of factory when traditional absorption systems developed
A
- Direct costs were a high proportion of total costs
- Relatively small number of support functions therefore low OHs
- Low level of mechanisms
- Very labour based production
- Large runs of standardised product
- Slow rate of change both of products and methods
2
Q
Characteristics of a typical factory now
A
- Greater automation + computerisation
- Manufacturing overheads are higher proportion of total costs
- Growth in service support function
- Support functions are unaffected by production volume. They vary in the long term- according to the range + complexity of products
- consequently, absorbing overheads simply on production volume tends to over cost high volume products and under cost low volume products
3
Q
Cost driver
A
- activity or transaction, which is a significant determination of cost
4
Q
What benefits does ABC provide
A
- more accurate and more precise decisions
- increases understanding of OH + cost drivers
- effective challenge of operating costs to find better ways of allocating and eliminating OHs
- enables improved product and customer profitability analysis
- supports performance management techniques (continuous improvement + balanced scenarios)
5
Q
Traditional v ABC
1
A
- one overhead rate
- easier to implement
- only allocates product cost
- can be used for external cost
- can be used for external reports
- required 1 set of body
- less accurate
6
Q
Traditional v ABC
A
- multiple activity based costs (cost pools)
- difficult to implement
- may allocate period cost
- cannot be used for external reports
- required two more sets of bodies
- more accurate
- costs become easier to control
7
Q
Activity based costing
A
- shows the relationship between overhead and the activities that caused them. ABC focuses attention on what factors cause or drive costs
