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Activity Based Costing (ABC)
Finance & Accounting
Pages 12 (3012 words)
In general, activity based costing (ABC) has been largely described as an alternative method of allocating overhead costs based on logic rather than arbitrarily imputing cost entirely to resulting production output. …
Historically, ABC started to become popular as an alternative approach to traditional cost accounting about three decades ago, where the latter has become increasingly proving its irrelevance (Emblemsvag, 2010). The increasing automation of production as compared to being labor-intensive, the multiple product lines compared to small number of products being produced, and the increasing overhead cost of companies are factors which are said to have contributed to the popularity of ABC (Emblemsvag, 2010).
ABC is said to have addressed some important issues which traditional cost accounting may have left hanging when it comes to question of reason or logic in cost allocation. Comparing the two methods of allocating cost, Emblemsvag (2010) highlighted three salient points of ABC:
1. ABC assumes cost objects consume activities whereas traditional cost accounting assumes cost objects consume resources,
2. ABC uses drivers at various levels (hence consumption, and therefore cost varies at all levels), while traditional cost accounting usually employs volume related allocation as bases for costs, and
3. ABC is process oriented, while traditional cost accounting is process oriented.
Higher productivity as a desired goal or objective, therefore, is better achieved using activity based costing than traditional cost accounting. ...
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