Activity based costingThe reason of increasing inaccuracy of absorption costing is due to the following basic issues:I. Increase production complexity II. Increase proportion of overheadsIII. Increase product linesABC is an alternative approach to product costing. It is a form absorption costing. But rather then absorbing overheads on production value basis, it firstly allocates then to cost pools before absorbing them into units using cost driver.explain all this using easy words
Question
Activity based costingThe reason of increasing inaccuracy of absorption costing is due to the following basic issues:I. Increase production complexity II. Increase proportion of overheadsIII. Increase product linesABC is an alternative approach to product costing. It is a form absorption costing. But rather then absorbing overheads on production value basis, it firstly allocates then to cost pools before absorbing them into units using cost driver.explain all this using easy words
Solution
Sure, let's break it down:
-
"Increase production complexity": This means that as the process of making a product becomes more complicated, it's harder to accurately determine how much it costs to make each product.
-
"Increase proportion of overheads": Overheads are the ongoing costs to operate a business that can't be directly linked to a product or service. If these costs increase, it becomes more difficult to accurately assign these costs to each product.
-
"Increase product lines": This means that as a company offers more types of products, it becomes more challenging to accurately determine the cost of each product.
Activity Based Costing (ABC) is a method that tries to solve these problems. Instead of spreading overhead costs based on the production value (how much of each product is made), ABC first groups similar overhead costs together into "cost pools". Then, it assigns these costs to each product based on a "cost driver", which is the factor that causes the cost to occur. This could be something like the number of hours of labor needed to make the product, or the amount of materials used. This method can provide a more accurate picture of the true cost of each product.
Similar Questions
Fill in the Blank QuestionFill in the blank question.The basic principle of activity-based costing is that a(n) is what causes overhead cost to be incurred.
The essential difference between __________ costing and ____________ costing is timing.Select one:a.manufacturing, overheadb.absorption, activity-basedc.variable, absorptiond.fixed, variable
Fill in the Blank QuestionFill in the blank question.When units produced are greater than units sold under variable costing, fixed overhead is an expense and results in (lower, higher) net income than under absorption costing.
Fundamentals of Cost and Management Accounting (Study Text) 165 | P a g e Example Company A produces a single product with the following budget: Selling price Rs 10 Direct materials Rs 3 per unit Direct wages Rs 2 per unit Variable production overhead Re 1 per unit Fixed production overhead Rs 10,000 per month. The fixed overhead absorption rate is based on volume of 5,000 units per month. There was production of 6000units i.e 4,800 units were sold and 1200 units left in closing stock. Prepare the profit statement for the month under absorption costing.
Fill in the Blank QuestionFill in the blank question.Under the (absorption,variable) costing method only variable costs are assigned to products.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.