Activity
Based Costing is a costing method that arouses in late 80’s due to the lack of
coherence and relevance of commonly used coat accounting methods. It is a
special costing method and is based on the modal of assigning productions costs
to the products in a more logical and relevant method. In traditional cost
accounting methods manufacturing costs were allocated on the bases of the
machine hours however, activity based costing is a method in which cost is
assigned to the products or operations on the bases o the resources consumed by
those products or operations. The aim of the activity based costing is to
change the method in which the costs were counted in the traditional
accounting.
In
traditional cost accounting methods the over heads associated with the
manufacturing such as cost of lighting, heating and marketing are associated in
proportion to the direct cost of the particular activity. This is an
unsatisfactory method of calculating the costs as it may happen that two
different activities incur same direct cost but absorb different in direct
costs by using different amount of overheads. For example a mass production of
industrial robot will use same amount of labor and production material as used
in the production of a batch of customized robot however the customized robot
will use more time and effort by the firm’s engineers as compared to the mass
produced robots. Such a difference of overhead costs is not calculated in the
traditional costing system so the company producing customized products will
soon incur losses. Activity based costs allocates overhead costs in a more
precise way while calculating the production costs as a result it is more
reliable method of cost accounting.
Activity
Based Costing is known to be one of the most useful innovations in the
managerial accounting. Its major objective is to identify the activities that a
firm performs while manufacturing a product and then assign indirect costs to
the product in a more comprehensive way. It is a costing modal that identifies
relationship between costs, activities performed and products manufactured. Through
these three parameters activity based costing assign indirect costing to the
product in a less arbitrary format. Activity based costing is a method of
assigning cost that is primarily used in manufacturing sector. The reason is
that some types of costs such as costs of staff salaries and management cost is
difficult to assign to the production of a particular product.
