What is Activity based costing(ABC)?
What is Activity based costing(ABC)? & Traditional costing
Traditional costing
Concept of traditional costing
Influenza A virus subtype H5N1 divulge of activities are involved inward manufacturing products of providing services. Some of such activities are buy of materials, production planning, processing of orders, techn
Cost contestation nether traditional costing
The agency of calculating the toll per unit of measurement past times preparing a toll contestation is equally under.
a. In the starting fourth dimension stage, the full overhead should live ascertained.
b. In the 2d stage, the base of operations of allocating the overhead s should live calculated. The bases many live production units or labor hours or machine hours.
c. In the tertiary stage, the per unit of measurement or per sixty minutes overhead toll is calculated equally under.
Overhead rate= full overhead/ full output or labour sixty minutes or machine hour
d. In the 5th stage, the overhead toll of each production or subdivision is calculated multiplying the unit of measurement or hours past times the respective rates, if per unit overhead toll is live calculated, separate the full overhead of each production or subdivision past times the respective units or hours.
e. In the 6th stage, the full toll is calculated past times adding the overhead alongside the prime number cost. Remember prime number toll is comprised alongside direct material, direct labour too direct expenses.
f. At last, the per unit of measurement toll is calculated dividing the full toll past times the units of the respective production or department.
Statement of toll traditional costing
Limitations of traditional costing
The next are the limitation of traditional costing systems.
• In traditional costing systems, overhead are absorbed on the the world of book based activeness inward production unit of measurement or machine sixty minutes or labour hour. But at that topographic point are some overhead, which are non dependant on them. So, it may non ascertain the accurate figure of cost.
• The traditional the world of segregating costs into fixed too variable elements on the the world of their behaviors is to a greater extent than oftentimes than non considered to live unrealistic. It is due to the alongside the increment of business, the costs have got larn to a greater extent than complex too complicated.
• The traditional method applied for absorbing overheads lays emphasis on the calculation too application of overhead recovery rates, which are accepted for the valuation of stock for the purposes of routing fiscal reporting. The administration does non observe these traditional methods helpful inward making complicated decisions related to production strategies.
• The traditional absorption costing does non homecoming whatever valuable assistance to multi-product concerns inward making decisions regarding physical care for technology, product-mix, production pricing etc.
Activity based costing is a systems of costing inward which the overheads are assigned or related to activities or grouped into toll pools before they are assigned or related to toll objective i.e. products or services. It is a method of toll attribution to toll units on the world of benefits received from indirect activities. Activities larn the focal points for toll accumulation. According to this systems full overhead are firstly traced into ii or to a greater extent than production activities too and then suitable toll drives are used to calculated per units toll of overheads. Product goods or rendering services. Activities based costing is made on the the world of toll driver requires for producing goods or rendering services. An activeness is the toll middle where the overhead are allocated whereas toll drive is the the world or indicator, which helps to line overheads into product. This costing scheme assumes that activities are responsible for the incurred of toll too products create the demands for activities. Costs are charged to products based on private product's exercise of each activity. An activeness is an trial is an event, undertaking or unit of measurement of piece of work alongside a specified purpose e.g., designing products. Setting upward machines, operating machines too distributing products.
Limitations of traditional costing
The next are the limitation of traditional costing systems.
• In traditional costing systems, overhead are absorbed on the the world of book based activeness inward production unit of measurement or machine sixty minutes or labour hour. But at that topographic point are some overhead, which are non dependant on them. So, it may non ascertain the accurate figure of cost.
• The traditional the world of segregating costs into fixed too variable elements on the the world of their behaviors is to a greater extent than oftentimes than non considered to live unrealistic. It is due to the alongside the increment of business, the costs have got larn to a greater extent than complex too complicated.
• The traditional method applied for absorbing overheads lays emphasis on the calculation too application of overhead recovery rates, which are accepted for the valuation of stock for the purposes of routing fiscal reporting. The administration does non observe these traditional methods helpful inward making complicated decisions related to production strategies.
• The traditional absorption costing does non homecoming whatever valuable assistance to multi-product concerns inward making decisions regarding physical care for technology, product-mix, production pricing etc.
Activity based costing
Concept of activeness based costingActivity based costing is a systems of costing inward which the overheads are assigned or related to activities or grouped into toll pools before they are assigned or related to toll objective i.e. products or services. It is a method of toll attribution to toll units on the world of benefits received from indirect activities. Activities larn the focal points for toll accumulation. According to this systems full overhead are firstly traced into ii or to a greater extent than production activities too and then suitable toll drives are used to calculated per units toll of overheads. Product goods or rendering services. Activities based costing is made on the the world of toll driver requires for producing goods or rendering services. An activeness is the toll middle where the overhead are allocated whereas toll drive is the the world or indicator, which helps to line overheads into product. This costing scheme assumes that activities are responsible for the incurred of toll too products create the demands for activities. Costs are charged to products based on private product's exercise of each activity. An activeness is an trial is an event, undertaking or unit of measurement of piece of work alongside a specified purpose e.g., designing products. Setting upward machines, operating machines too distributing products.
R. Cooper too R.S. Kaplan defines "ABC systems calculated the costs of private activities too assign costs to toll objects such equally products too services on the the world of the activities undertaken to create each production or services."
Likewise, according to T. Lucey, "activity based costing tin live idea of equally a method of charging overheads of toll units on the the world of benefits received from the item indirect activities e.g. ordering planning, setting too so on, activities based costing seeks non entirely to allocate overhead to production toll on a to a greater extent than realistic the world than uncomplicated products volume, but too attempts to exhibit the human relationship betwixt overhead costs too the activities than crusade them."
From the higher upward statements the next facts regarding activities based costing are summarized.
a. Production required activities.
b. Production piece of work needs direct toll equally good equally indirect costs (overhead).
c. Direct toll too overhead toll are related alongside dissimilar activities.
d. Overhead toll is charged past times showing the human relationship betwixt overhead too activities that causes them.
e. The overhead allotment on the the world of activities gives correct, accurate too realistic allotment to products. Thus, it gives the truthful film of cost.
Significant damage inward activities based costing
The activities based costing systems involves the exercise of the next terms:
a. Cost objects: generally, the products are toll objects, but the customers, services or locations to too live the toll objects.
b. Activities: these consist of the aggregate of dissimilar tasks too are concerned alongside functions associated alongside toll objectives. There are ii types of activities:
i. Support activities
ii. Production physical care for activities
Supports activities are, for example, schedule production, laid upward machine, buy materials, too inspect items, client orders, too supplier records etc. nether the production physical care for activity, machine production too assembled products are included inside this production process.
Activities toll centers are, sometimes, similar to toll centers used nether traditional costing systems inward instance the purchasing subdivision too purchasing activeness both are treated equally toll centers, the back upward activeness toll middle too becomes identical to toll middle taken nether traditional costing system.
c. Cost pool: it is some other holler given to a toll middle too therefore, an activeness toll middle may too live termed equally an activeness toll pool.
d. Cost drivers: the cases for incurrence of overhead toll are known equally toll driver is factor the modify of which results inward a final result accuse inward the full toll of a related object. It is whatever factor of strength that causes a modify inward the toll of an activity. Cost drive may live divided into ii parts:
i. Resource toll driver
ii. Activity toll driver
Influenza A virus subtype H5N1 resources toll driver is a stair out of the quantity of resources consumed past times an activity, it is used to assign the toll of a resources to an activeness or toll pool. An activeness toll driver is a stair out of the frequency too involvement of demand, house on activities past times toll objects. It is used to assign activities toll to toll objects.
Classification of activities
As started earlier, activities are identified too classified into dissimilar categories or segments of their production process. The groping of activities is preferably done the dissimilar levels at which activities, are performed. Broadly, activities are classified into ane of iv activeness categories:
a. Unit related activities: these are the activities which are performed each fourth dimension of a unit of measurement is produced. They are repetitive. For example, direct labour hours, machine hours, mightiness are used each fourth dimension of a unit of measurement is produced. Direct materials too direct labour activities are laso unit of measurement related activities, although they are non overhead costs. Costs of unit of measurement related activities vary alongside the divulge of units produced.
b. Batch related activities: these are the activities, which are performed each fourth dimension a batch of goods or products is produced. The costs of batch related activities vary alongside the divulge of batches but are fixed alongside observe to the divulge of units inward each batch. Machine laid ups, inspections, production scheduling, materials treatment are representative of batch related activities which are related to batches but non to private products.
c. Product related activities: these are the activities, which are performed to back upward the production of each dissimilar type of product. Maintenance of equipment, engineering scientific discipline charges, testing routines, maintaining bills of materials, treatment materials are some representative of batch related activities.
d. Facility related activities: these are the activities, which are needed to sustain a factory's full general manufacturing process. These activities are mutual to a variety of products too are most hard to link to production specific activities. Examples of facility related activities are mill management, maintenance, security, works life depreciation. In ABC system, facility related activities caffeine costs are traded equally menses toll are they are works life hard to assign to dissimilar products. The costs associated which the starting fourth dimension 3 categories-unit 1 related, batch related, production related are assigned to products, using toll drives that reverberate the causes too effect human relationship betwixt activity, consumption too cost.
a. identifies the dissimilar activities: starting fourth dimension the major activities are to live identified too and then classified into dissimilar categories that have got human relationship alongside the dissimilar parts of the production process. Such identification is of import because products required too activities eat costs, examples of some such activities are direct labour related activities, machine related activities too diverse supports activities, such equally ordering, receiving, materials handling, production scheduling laid up, packing too dispatching etc.
B. Determine the toll drivers of each activity: activeness based costing is based on the supposition that toll behaviors are influenced past times toll drivers. Therefore, inward social club to line overhead costs to products, appropriate toll drives should live identified. In tradition production costing, the numbers of toll drivers used are few such equally direct labour hours, machine hours, direct labour cost, units but ABC may exercise a multitude of toll drivers that relate costs to a greater extent than closely to the resources consumed too activities occurring. The factors that influence the toll of a item activeness are known equally toll drivers. It should live sympathize that direct costs practise non demand toll drivers equally they tin live traced direct to a product. Direct costs are themselves toll drivers. However, all other indirect mill or manufacturing costs demand toll driver. Cost drivers signify factors, farces or events that decide the costs of activities. Costs drovers are the links too they tin link a puddle of costs inward an activities middle to the product. Some of the activities too their toll drivers are mentioned below:
Likewise, according to T. Lucey, "activity based costing tin live idea of equally a method of charging overheads of toll units on the the world of benefits received from the item indirect activities e.g. ordering planning, setting too so on, activities based costing seeks non entirely to allocate overhead to production toll on a to a greater extent than realistic the world than uncomplicated products volume, but too attempts to exhibit the human relationship betwixt overhead costs too the activities than crusade them."
From the higher upward statements the next facts regarding activities based costing are summarized.
a. Production required activities.
b. Production piece of work needs direct toll equally good equally indirect costs (overhead).
c. Direct toll too overhead toll are related alongside dissimilar activities.
d. Overhead toll is charged past times showing the human relationship betwixt overhead too activities that causes them.
e. The overhead allotment on the the world of activities gives correct, accurate too realistic allotment to products. Thus, it gives the truthful film of cost.
Significant damage inward activities based costing
The activities based costing systems involves the exercise of the next terms:
a. Cost objects: generally, the products are toll objects, but the customers, services or locations to too live the toll objects.
b. Activities: these consist of the aggregate of dissimilar tasks too are concerned alongside functions associated alongside toll objectives. There are ii types of activities:
i. Support activities
ii. Production physical care for activities
Supports activities are, for example, schedule production, laid upward machine, buy materials, too inspect items, client orders, too supplier records etc. nether the production physical care for activity, machine production too assembled products are included inside this production process.
Activities toll centers are, sometimes, similar to toll centers used nether traditional costing systems inward instance the purchasing subdivision too purchasing activeness both are treated equally toll centers, the back upward activeness toll middle too becomes identical to toll middle taken nether traditional costing system.
c. Cost pool: it is some other holler given to a toll middle too therefore, an activeness toll middle may too live termed equally an activeness toll pool.
d. Cost drivers: the cases for incurrence of overhead toll are known equally toll driver is factor the modify of which results inward a final result accuse inward the full toll of a related object. It is whatever factor of strength that causes a modify inward the toll of an activity. Cost drive may live divided into ii parts:
i. Resource toll driver
ii. Activity toll driver
Influenza A virus subtype H5N1 resources toll driver is a stair out of the quantity of resources consumed past times an activity, it is used to assign the toll of a resources to an activeness or toll pool. An activeness toll driver is a stair out of the frequency too involvement of demand, house on activities past times toll objects. It is used to assign activities toll to toll objects.
Classification of activities
As started earlier, activities are identified too classified into dissimilar categories or segments of their production process. The groping of activities is preferably done the dissimilar levels at which activities, are performed. Broadly, activities are classified into ane of iv activeness categories:
a. Unit related activities: these are the activities which are performed each fourth dimension of a unit of measurement is produced. They are repetitive. For example, direct labour hours, machine hours, mightiness are used each fourth dimension of a unit of measurement is produced. Direct materials too direct labour activities are laso unit of measurement related activities, although they are non overhead costs. Costs of unit of measurement related activities vary alongside the divulge of units produced.
b. Batch related activities: these are the activities, which are performed each fourth dimension a batch of goods or products is produced. The costs of batch related activities vary alongside the divulge of batches but are fixed alongside observe to the divulge of units inward each batch. Machine laid ups, inspections, production scheduling, materials treatment are representative of batch related activities which are related to batches but non to private products.
c. Product related activities: these are the activities, which are performed to back upward the production of each dissimilar type of product. Maintenance of equipment, engineering scientific discipline charges, testing routines, maintaining bills of materials, treatment materials are some representative of batch related activities.
d. Facility related activities: these are the activities, which are needed to sustain a factory's full general manufacturing process. These activities are mutual to a variety of products too are most hard to link to production specific activities. Examples of facility related activities are mill management, maintenance, security, works life depreciation. In ABC system, facility related activities caffeine costs are traded equally menses toll are they are works life hard to assign to dissimilar products. The costs associated which the starting fourth dimension 3 categories-unit 1 related, batch related, production related are assigned to products, using toll drives that reverberate the causes too effect human relationship betwixt activity, consumption too cost.
Procedures of activities based costing
The procedures of activities based costing are equally under:a. identifies the dissimilar activities: starting fourth dimension the major activities are to live identified too and then classified into dissimilar categories that have got human relationship alongside the dissimilar parts of the production process. Such identification is of import because products required too activities eat costs, examples of some such activities are direct labour related activities, machine related activities too diverse supports activities, such equally ordering, receiving, materials handling, production scheduling laid up, packing too dispatching etc.
B. Determine the toll drivers of each activity: activeness based costing is based on the supposition that toll behaviors are influenced past times toll drivers. Therefore, inward social club to line overhead costs to products, appropriate toll drives should live identified. In tradition production costing, the numbers of toll drivers used are few such equally direct labour hours, machine hours, direct labour cost, units but ABC may exercise a multitude of toll drivers that relate costs to a greater extent than closely to the resources consumed too activities occurring. The factors that influence the toll of a item activeness are known equally toll drivers. It should live sympathize that direct costs practise non demand toll drivers equally they tin live traced direct to a product. Direct costs are themselves toll drivers. However, all other indirect mill or manufacturing costs demand toll driver. Cost drivers signify factors, farces or events that decide the costs of activities. Costs drovers are the links too they tin link a puddle of costs inward an activities middle to the product. Some of the activities too their toll drivers are mentioned below:
d. Create a toll puddle or toll middle for each activity: inward this step, mill overhead costs of the activeness are determined too classified into homogeneous toll pools. Influenza A virus subtype H5N1 homogeneous toll puddle is a collection of overhead costs that are logically related to the tasks existence performed. Influenza A virus subtype H5N1 toll puddle should live created for each activity. Cost puddle is similar middle or activeness middle some which costs are accumulated. The importance supposition nigh activeness middle toll pools are that the costs inward each toll pools are driven past times homogeneous activities too strictly proportional to the activity.
e. Calculate the toll drive rates: afterward toll puddle is defined too toll drivers are identified, the toll per unit of measurement of the toll driver is computed for that pool. This is called the puddle charge per unit of measurement or toll driver rate. The activeness toll driver rates for each activeness are calculated inward the agency inward which overhead absorption rates would live calculated nether the traditional absorption costing system. These activeness toll driver rates are to live used for ascertaining the amount of overhead chargeable to diverse toll objects or products. These puddle rates create links betwixt costs too toll drivers used. This puddle charge per unit of measurement tin live based on either planned or actual activeness levels. It tin live presented equally follows:
f. Trace the toll of activities to products: inward this step, the costs of each overhead puddle are traced to products or toll objective which are the users of the resources. These, at the concluding stage, the toll pool, toll drive too the puddle are combined to decide how much toll should live assigned to each past times multiplying the activeness toll drive rates past times dissimilar amounts of each activeness that each production or toll object consumes.
e. Calculate the toll drive rates: afterward toll puddle is defined too toll drivers are identified, the toll per unit of measurement of the toll driver is computed for that pool. This is called the puddle charge per unit of measurement or toll driver rate. The activeness toll driver rates for each activeness are calculated inward the agency inward which overhead absorption rates would live calculated nether the traditional absorption costing system. These activeness toll driver rates are to live used for ascertaining the amount of overhead chargeable to diverse toll objects or products. These puddle rates create links betwixt costs too toll drivers used. This puddle charge per unit of measurement tin live based on either planned or actual activeness levels. It tin live presented equally follows:
f. Trace the toll of activities to products: inward this step, the costs of each overhead puddle are traced to products or toll objective which are the users of the resources. These, at the concluding stage, the toll pool, toll drive too the puddle are combined to decide how much toll should live assigned to each past times multiplying the activeness toll drive rates past times dissimilar amounts of each activeness that each production or toll object consumes.
Total overhead per product= full drivers for the production x toll driver rate
g. Computing the full costs of products or toll objects: finally, the full costs of the products or toll objects shall live computed past times adding all direct too indirect costs assigned to them.
Comparison betwixt traditional costing too activeness based costing
Following are the primary dissimilar betwixt activeness based costing too traditional costing system:
a. Under ACB system, overhead costs are identified to each major activeness instead of the departments equally nether traditional costing system. It results inward greeter divulge of toll middle nether ABC system.
b. The term 'cost driver' is non used traditional costing systems. Populate damage are the world of allotment or apportionment. Under ABC systems, toll drivers are fewer inward divulge for the purpose of changing overhead to products.
c. ABC scheme uses separate rates for supporting centers too these is no re-apportionment to production centers, equally is the instance nether traditional costing systems.
Advantages of activeness based costing
The next are the primary advantages of ABC system:
a. It gives accurate too truthful figure of toll due to dissimilar overhead costs are distributed on the the world of dissimilar suitable toll drivers.
b. It helps agreement the behaviors of overhead costs too their human relationship to products, services, customers too markets segments.
c. Since all the overhead are distributed on the the world of suitable toll drivers, so that, proper tape keeping of dissimilar toll drivers are kept. So it assists to command over the costs.
d. Its helps the administration inward taking ameliorate determination relating to products strategies, production designs, production mix too marketing.
e. ABC systems are really helpful inward making the evaluation of novel physical care for engineering inward multi-product concerns.
f. It provides the right data for performance measuring because if focuses on activities rather than resources.
g. This scheme makes available a systematic study on the resources spending equally good equally on resources consumption.
h. It provides accurate data on turn a profit margin too performance measuring for turn a profit improvement.
Limitations of activeness based costing system
The next are the limitation of the ABC system:
a. It is complex inward comparing of traditional costing, due to dissimilar toll drivers are used to distribute dissimilar overhead.
b. To identifying the suitable toll driver is tough job. If proper/right toll drivers is non chosen the overhead absorption may non gives truthful figure.
c. It is costly; because it needs specialized accounting systems too skilled accounting for that nosotros have got to pay more.
d. It is suitable for large scheme only.
e. As ABC concept is even so inward primary phase of development, its applicability is even so doubtful.
Impact of book diversity
If the production of dissimilar products is done inward similar quantities, at that topographic point volition non live a signification divergence on per unit of measurement toll too turn a profit betwixt the traditional too activeness based costing. On the other hand, when the quantities of the products existence produced vary sigficantly, some abnormal differences may be on the per unit of measurement toll equally good equally turn a profit betwixt these costing methods. Such an abnormal divergence inward per unit of measurement toll too turn a profit that crusade due to the dissimilar inward book is called the send upon of book diversity. The next representative shows the send upon of book diversity.
c. Since all the overhead are distributed on the the world of suitable toll drivers, so that, proper tape keeping of dissimilar toll drivers are kept. So it assists to command over the costs.
d. Its helps the administration inward taking ameliorate determination relating to products strategies, production designs, production mix too marketing.
e. ABC systems are really helpful inward making the evaluation of novel physical care for engineering inward multi-product concerns.
f. It provides the right data for performance measuring because if focuses on activities rather than resources.
g. This scheme makes available a systematic study on the resources spending equally good equally on resources consumption.
h. It provides accurate data on turn a profit margin too performance measuring for turn a profit improvement.
Limitations of activeness based costing system
The next are the limitation of the ABC system:
a. It is complex inward comparing of traditional costing, due to dissimilar toll drivers are used to distribute dissimilar overhead.
b. To identifying the suitable toll driver is tough job. If proper/right toll drivers is non chosen the overhead absorption may non gives truthful figure.
c. It is costly; because it needs specialized accounting systems too skilled accounting for that nosotros have got to pay more.
d. It is suitable for large scheme only.
e. As ABC concept is even so inward primary phase of development, its applicability is even so doubtful.
Impact of book diversity
If the production of dissimilar products is done inward similar quantities, at that topographic point volition non live a signification divergence on per unit of measurement toll too turn a profit betwixt the traditional too activeness based costing. On the other hand, when the quantities of the products existence produced vary sigficantly, some abnormal differences may be on the per unit of measurement toll equally good equally turn a profit betwixt these costing methods. Such an abnormal divergence inward per unit of measurement toll too turn a profit that crusade due to the dissimilar inward book is called the send upon of book diversity. The next representative shows the send upon of book diversity.
In the higher upward example, at that topographic point no dissimilar inward the per unit of measurement toll equally good equally turn a profit nether traditional method irrespective of the book different. The per unit of measurement toll is Rs20 too per unit of measurement turn a profit is Rs five nether both the products. Contrary to this, at that topographic point are dissimilar inward the per unit of measurement toll equally good equally turn a profit nether activeness based costing. As a result, the toll per unit of measurement of production is high alongside production 'p1' resulting inward loss where the per unit of measurement toll is depression resulting inward turn a profit alongside the production 'p2'. Though the full turn a profit remains the same, the p2 is to a greater extent than profitable than p1. In this way, activeness based costing is helpful inward assessing the profitable of each product.
Activity based profitability analysis
The method of calculating the turn a profit nether traditional too activeness based costing are different. Under, traditional method the gross profit/ loss are calculated past times subtracting the toll of goods sold from sales. The internet profit/loss is calculated past times subtracting the operating expenses from the gross profit. But, profit/loss is calculated alongside dissimilar degree equally unit of measurement level, production level, production line degree too works life level.
According to these dissimilar levels, the income statatement nether activeness based costing is prepared equally under.
1. State the limitation of traditional costing system.
The next are the limitations of traditional system.
a. In traditional costing system, overhead are absorbed on the the world of book based activeness inward production unit of measurement or machine sixty minutes or labour hour. But t hither is some overhead, which are non dependant on them. So, it may non ascertain the accurate figure of cost.
b. The traditional basis of segregating costs into fixed too variable elements on the the world of their demeanor is to a greater extent than oftentimes than non considered to live unrealistic. It is due to the fact that alongside the increment of business, the costs have got larn to a greater extent than complex too complicated.
c. The traditional method applied for absorbing overhead lays emphasis on the calculation too application of overhead recovery rates, which are acceptable for the valuation of stocks for the purpose of routine fiscal methods helpful inward making complicated decisions unrelated to production strategies.
d. The traditional absorption costing does non homecoming whatever valuable assistance to multi-product concerns inward making decisions regarding physical care for technology, product-mix, production pricing etc.
2. What practise you lot hateful past times Activity Based Costing (ABC)?
Activity based costing is a scheme of costing inward which the overhead are assigned or related to activities or grouped into toll puddle before they are assigned or related to toll objects i.e. products or serves. It is a method of toll attribution to toll units on the the world of benefits received cast indirect activities'.
Activities larn the focal points for toll accumulation according to this scheme full overhead are firstly traced into ii or to a greater extent than production activities and too then suitable toll drivers are used to calculated per unit of measurement toll of overheads. Product toll determination nether activeness based costing inward made on the the world of toll drivers required for producing goods or rendering services whereas toll drive is the the world or indirect, which helps to line overhead into product.
3. Mention the advantages of Activity based costing.
The next are the primary advantages of ABC system:
a. It gives accurate too truthful figure of toll due to dissimilar overhead costs are distributed on the the world of dissimilar suitable toll drives.
b. It helps agreement the demeanor of overhead costs too their human relationship to products, services, client too markets segments.
c. Since all the overhead are distributed on the the world of suitable toll drivers, so that, proper tape keeping of dissimilar toll drivers are kept. So it assists to command over the costs.
d. It helps the administration inward taking ameliorate determination relating to production strategies, production designs, production mix too making.
e. ABC scheme is really helpful inward making the evaluation of novel physical care for technologies inward multi-product concerns.
Formula of list
1. Cost contestation nether traditional costing
Overhead rate= full overhead / full output or labour sixty minutes or machine hour
2. Total overhead per production = total drivers for the production x toll driver rate
3. Cost driver charge per unit of measurement = overheads/ nos. where nos. = full divulge of toll drivers
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