Question

Part-A

1. discuss the features of Activity-based costing system in detail.
2. Identify 2 specific Australian organisations that Activity-based costing system is suitable for, and explain why in detail.
3. Discuss the potential uses of the cost information for decision-making, to the managers in each of the 2 organisations selected in 2 above in detail.

Answer 1

Features of Activity Based Closing

· Cost is allocated based on activities consumed by product or service line

· All the activities are pooled in a group called Cost pool

· Cost can be assigned to each activities consumed in manufacture or delivery of service

· The activities consumed for each pool are clubbed together

· Activity rate is computed for each cost pool dividing the cost pool by total activities consumed

· The activity rate is applied to products based on activities consumed and total manufacturing overheads is applied.

2. Two Australian firms suitable for Activity Based Costing

· Service Firms -EY Australia and Deloitte Australia

· Manufacturing Firms- Unilever

The reason Activity Based costing is applicable because the work performed for clients can be classified into different activities and cost can be assigned to each activity. The activity rates can be applied to activities consumed for delivering service to each client.

In case of manufacturing firm Unilever – ABC method of costing can be applied for situation like export order servicing, servicing special and one time orders, etc

3. Potential use of cost information for decision- making

· ABC method helps in accurate product costing and product pricing. The allocation of overheads is more rational compared to conventional method and it helps in accurate and reliable product costing. The product pricing can be competitive and ensure the gross margin is achieved

· ABC method helps in elimination of non value adding activities since it needs study of activities for cost pool.

· ABC method helps in taking reliable decision like continue or discontinue of product or service lines, export order servicing, etc