Question

Describe the Activity-Based Costing method in the context of:

1. Characteristics, features and challenges; and

2. Application within service industries.

(50 + 50 = 100 marks)

Word limit: 1000 words

Answer 1

Answer:

Activity based costing is an accounting methodology used for assigning accurately the extent of resources consumed and overhead costs incurred to produce a product or service on the basis of value adding activities.

Characteristics and features of Activity based costing :

1.The total cost is divided into fixed cost and variable cost which is necessary to provide quality information to design a suitable cost system in a manufacturing concern.

2.The proper distinction is made between the cost behaviour patterns.

3.The cost behaviour patterns are volume related, diversity related, events related and time related.

4.The appropriate cost driver has to be identified for tracing the overhead to a product.

5.The cost drivers dictate the cost behaviour patterns.

Challenges in Activity based costing:

1.Collection and preparation of data is time consuming.

2.costs more to accumulate and analyse the information.

3.Source data isn't always readily availiable from normal accounting records.

4.may not be useful for companies where overhead is a small proportion of total operating costs.

Application in service industries:

ABC has same objectives in service firms as in manufacturing concerns.

In service organisations managers need accurate information about the cost of service being provided by them. Further such service firms requires to use this information to improve their operations and fulfill the needs of their customers in a more cost effective manner.

ABC helps service organisations to understand their cost base and to make decisions on value adding and non value adding activities.