Aat Revision Notes
Activity Based Costing
Cost attribution to cost units on the basis of benefits received from activities, i.e. ordering, setting up, assuring quality.
Activity costs and the instances of cost driver occurrence are measured and used to decide on overhead absorption rates.
Five stage process: 1. Identify the various activities within an organisation 2. Determine the key cost driver for each activity 3. Create cost pools to collect activity cost s having the same cost driver 4. Measure the incidence of each cost driver for each product/service 5. Attribute the cost of each pool (and activity) to products/services based on the cost driver recurrence.
ABC is founded on the premise that activities that cause costs not products.
Varies from traditional overhead attribution methods by:
Costs are identified by activities which can be linked in processes across departments rather than by costs centres. There are potentially more activities and cost pools than there are cost centres.
All activities are linked directly with products in contrast to traditional methods where departments overheads (ie service centre) are transferred to production cost centres.
There is a clear cause and cost effect.
Limitations: • Data needed in order to have an accurate system. Large amount, lot of manpower. • ABC systems utilise and produce data which is largely historic. • Many costs (ie rent rates etc) still need to be apportioned to activities or to cost centres via traditional methods, weakening ABC analysis. • May be difficult to establish causality for a particular activity. • Not a replacement for traditional methods but an extension of.
Limiting factor analysis – when one resource is limited, maximum demand for products needs to be know to calculate.
Value Added
The difference between sales revenue and the cost of bought in goods and services which is then used to finance value added activities.
Cost attribution to cost units on the basis of benefits received from activities, i.e. ordering, setting up, assuring quality.
Activity costs and the instances of cost driver occurrence are measured and used to decide on overhead absorption rates.
Five stage process: 1. Identify the various activities within an organisation 2. Determine the key cost driver for each activity 3. Create cost pools to collect activity cost s having the same cost driver 4. Measure the incidence of each cost driver for each product/service 5. Attribute the cost of each pool (and activity) to products/services based on the cost driver recurrence.
ABC is founded on the premise that activities that cause costs not products.
Varies from traditional overhead attribution methods by:
Costs are identified by activities which can be linked in processes across departments rather than by costs centres. There are potentially more activities and cost pools than there are cost centres.
All activities are linked directly with products in contrast to traditional methods where departments overheads (ie service centre) are transferred to production cost centres.
There is a clear cause and cost effect.
Limitations: • Data needed in order to have an accurate system. Large amount, lot of manpower. • ABC systems utilise and produce data which is largely historic. • Many costs (ie rent rates etc) still need to be apportioned to activities or to cost centres via traditional methods, weakening ABC analysis. • May be difficult to establish causality for a particular activity. • Not a replacement for traditional methods but an extension of.
Limiting factor analysis – when one resource is limited, maximum demand for products needs to be know to calculate.
Value Added
The difference between sales revenue and the cost of bought in goods and services which is then used to finance value added activities.