Question

) Briefly explain how product costs are viewed on a flow-of-activity basis.

Answer 1

Apart from direct material , direct labor and variable manufacturing costs --all that can be directly traceable & vary in direct proportion to number of units manuafctured--there are manufacturing overheads that go into the product costs.

These manufacturing Ohs do not vary ,in such a direct proportion , as the above said costs , but are somewhat mixed ,ie. Fixed upto certain ranges of production & vary , when that is exceeded , to go into the next slab.

Under Activity Based Costing,these costs are apportioned to products based on the activities necessary to produce the product--in other words,products that demand that activity are apportioned costs based on the measure of activity required , in the process of producing that product.

To do this, first, activities are scientifically analysed & costed per measure of activity. Then, depending on the measure of activity required for the product, products are assigned costs as measure of activity*Cost/measure.

Here, as the activity increases cost of the product increase, ie. Product costs accumulate as per the flow of activity , that are required to complete the product.

The more the same actvity, the more the costs that attach to the product.

Also,

the variety of activities that are required to complete the product also add to its costs.