Activity-based costing

Students of management accounting are faced with a whole new language which surrounds costing and managerial finance methods and techniques. Terms such as cost and value management; cost reduction, value analysis, quality assurance processes and activity based costing all add to the students’ financial vocabulary.

In this article I wish to focus on activity-based costing or as it is more commonly referred to ‘ABC’. This technique re-examines the problem that has faced accountants and accounting technicians for decades — that of the allocation and absorption of overhead.

Traditional pricing method has been based upon absorption costing principles and the treatment of overhead usually followed a set procedure:

• cost centres are identified and established within the business;

• cost centres may be producing or service centres;

• wherever possible a direct charge is made to a cost centre i.e., allocated overhead;

• where overhead is jointly incurred, it is apportioned to the cost centres on some equitable base;

• the overhead cost for the service centre is then transferred to producing centres;

• the total overhead cost for each producing centre is then divided by, for example, machine or labour hours per cost centre;

• overhead recovery rates are then determined;

• these are then used to absorb the overhead to products;

• in the short-run, if planned activity levels are actually achieved, then overhead may be fully recovered.

Such techniques may be used successfully where there is a limited product range and predetermined rates are well planned on achievable production volumes.

Case study

Cuecraft is an SME which manufactures high quality snooker and pool cues. For a number of years the accountant has dealt with the recovery of overhead in a traditional manner following the procedure outlined earlier.

The business has three major producing cost centres; Machining, Finishing and Packing.

The process of allocation and apportionment for period end March 2000 had been complete and the predetermined figures were:

Cost centre	Machining	Finishing	Packing
Overhead	£70,000	£27,500	£15,000
Machine hours	13,000	6,250	Tags Education February 4, 2003 0 1 minute read Facebook X LinkedIn Pinterest Reddit Messenger Messenger WhatsApp Share via Email Print ICAP announces Winter 2002 Professional Examination Results ICAP announces Winter 2002 Professional Examination Results Central excise duty withdrawn from sulphonic acid import Central excise duty withdrawn from sulphonic acid import Related Articles Is the Avalanche Headed for PricewaterhouseCoopers? July 10, 2014 Our Stubborn Tax Culture May 24, 2014 Needed: A Policy Doctrine on Information Security in Developing Countries – Part 1 December 8, 2003 Asset management in the new accounting world April 23, 2003 Check Also Close The seven deadly sins of strategy implementation March 12, 2003 Facebook X LinkedIn Pinterest Reddit WhatsApp Back to top button Stay up to date Don't miss out on the latest industry news and articles Subscribe Stay up to date Don't miss out on the latest industry news and articles Subscribe Subscribe Subscribe You are Subscribed! Your subscriptions means a lot to us. Don't miss out on the latest Industry news You are Subscribed! Close Search for Close Search for X