C. Circle the names of the cost drivers under ABC costing. Highlighted in Problem 3 - Wislow Company manufactures three product costs. It presently uses a. ABC assigns costs based on activities and resource usage, in contrast with traditional Contradictory and uncertain cost estimates can be a problem when. ACTIVITY-BASED COSTING PROBLEM. Contrasting Traditional Costing & Activity-Based Costing. ACCT Handout # The Columbus Company.
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Companies move to Activity -Based Costing to better understand the true costs of goods and services.
- ACG Sample Test PRoblems Chapters 35 and 36
- Activity-Based Costing (ABC) | Cost Accounting
- What is Activity-Based Costing?
The activities that go into them Resources consumed by these activities ABC activity based costing problems with traditional costing cost accountingwhich sometimes assigns costs using somewhat arbitrary allocation percentages for overhead or the so-called indirect costs.
As a result, ABC and traditional cost accounting can estimate the cost of goods sold and gross margin very differently for individual products.
Contradictory and uncertain cost estimates can be a problem when management needs to know exactly which products are profitable and which are selling at a loss.
Activity Based Costing vs. Traditional Steps, Results Compared
Cost accountants know that traditional cost accounting can hide or distort information on activity based costing problems costs of individual products and services—especially where local cost allocation rules misrepresent actual resource usage.
As a result, the move to ABC usually motivated by a desire to understand the "true costs" of individual products and services more accurately.
Companies implement activity-based costing to: Identify specific products that are unprofitable. Improve production process efficiency.
Activity Based Costing Example/Problem:
After cost pool is defined and cost drivers identified, the cost per unit of the cost driver is computed for that pool.
This is called the pool rate.
The pool rate links costs and cost drivers with the resource use. A cost driver rate is calculated as follows: This is the last step in application of activity-based Costing. Here, the costs of activities are traced to products on the basis of activity based costing problems by products.
The cost drivers are used to measure product demand of activities. For example, if the total costs of purchasing materials were Rs.
Activity Based Costing Example/Problem -
The rate per purchase order is Rs. If a particular product needs 2 purchase orders, charge to that product will activity based costing problems Rs.
If 10 units of the product are produced, cost per unit will be Rs.
In this way cost of other activities will be charged to product. Advantages of Activity-Based Costing: Activity-based costing has primarily developed on account of the limitations of traditional system of charging overhead costs.
It became an increasing important tool for a large majority of organisations throughout the world. It offers the following advantages: