Simple traditional distinction made between fixed cost and variable cost is not enough guide to provide quality information to design a cost system.
The more appropriate distinction between cost behaviour patterns are volume (scale) related, diversity (scope) related, events (decisions) related and time related.
Cost drivers need to be identified. A cost driver is a structural determinant of cost related activity. The logic behind is that cost drivers dictate the cost behaviour pattern. In tracing overhead cost to product, a cost behaviour pattern must be understood so that appropriate cost driver could be identified.
Key Areas of ABC:
Following are the three key areas of ABC:
Product cost differentiation.
Activities and their cost drivers.
Identification of non-value added cost.
In ABC system a cost center is established for each cost driver and identification, measurement and control of cost drivers is essential in ABC. ABC is the planned and systematic study and determination of cost of each of the branches of business activities that add to the value of product and services.
Kaplan and Cooper of Harvard Business School, who have developed this new approach in costing to calculate product costs, claim that the costs should be classified as long-term variable costs and short-term variable costs. Traditionally short-term variable costs are known as variable costs and long-term are known as fixed costs.…
There are three important components of strategic cost management: Strategic Positioning Analysis: It determines the company’s comparative position in the industry in terms of performance. Strategic positioning analysis is an approach for researching what future environments might be like in your internal corporate structure as well as your external environment…
Cost behavior is an indicator of how a cost will change in total when there is a change in some activity. In cost accounting and managerial accounting. Cost behavior is the manner in which expenses are impacted by changes in business activity. A business manager should be aware of cost…
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