Question

Can you explain a bit more how BBC (Behavior Based Costings) works? I'm not as familiar with this costings sytem.

Answer 1

Behaviour Based Costing is also known as Activity Based Costing.

Many organisations do not wish to know how much it costs to make a product with precise accuracy. This is because pricing is based on what the market will bear, competitors' moves, etc. Others, however fix their price on cost and need to be able to determine it with reasonable accuracy. The latter organisations have been greatly benefitted from the development of activity based costing, which is a modern absorption costing method.

Activity Based Costing assigns costs to activities rather than products or services. This enables resources & overhead costs to be more accurately assigned to products & services that consume them.

Companies are now adopting Activity Based Costing for following reasons -

1. Fierce competition pressure has resulted in shrinking profit margins. Activity Based Costing helps to estimate cost of individual product or service more accurately. This helps to formulate appropriate marketing/corporate startegy.

2. There is product and customer proliferation. Demand on resources by products/ customers differ among product/customers. Therefore, product/customer profitability can be measured reasonably accurately, only if consumption of resources can be traced to each individual product/customer.