Question

1. How does ABC differ from traditional product costing systems?

2. How do you calculate the activity rates and what are they used for?

3. Discuss the types of management reports that can be used with ABC costing.

Answer 1

1. ABC System is a costing technique where the overheadd cost is allocated to different products or departments based on certain cost pool or cost drivers or activities associated with those products or departments. Under traditional system, Overhead cost is allocated to the different products or departments based on some pre-determined overhead rates, such as Machine hour rate, Labour Hour rate etc. ABC system is more scientific and accurate as compared to traditional system.

2. Activity rate is calculated by dividing the total cost of an activity by the numbers of that actiity. if total cost of an activity is 10000 and there are 20 numers of that activity then, activity rate = 10000/20 = 500 per activity.

3. ABC costing can be used in analysis of product cost or the product cost sheet or job cost sheet. It can also be used in some business analysis reports seeking to identify the costly activities. It can also be used to analyse and find wheather there is a need of production process re-engineering or restructuring. so, ABC system is a modern and scientific management tool which has various use in modern business management and decisiom making.

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