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The differences between absorption costing and Activity Based Costing in applying overheads to products/services. ...
¡°The objective of the overhead absorption process is to include in the
total cost of a product an appropriate share of the firms total overheads¡±
(T. ... Absorption costing is the traditional method and this charges overheads based on production volume using an overhead absorption rate (O. ... Some common bases are direct labour hours, machine hours, direct wages, prime cost, etc. ...
¡°The wide range of overheads possible, emphasises the point that there
is no such thing as a singly accurate cost. ... Then material cost should not be chosen as an absorption base, because this will distort the level of overhead for each product. ... It was developed to deal with the problems in the conventional absorption costing method. ... What activity causes a cost? ... These would be the cost driver of the production scheduling costs. In activity based costing the overheads are divided in different ¡°cost pools¡± similar to departments. A cost driver is chosen for each cost pool. There should be a direct relationship between the consumption of overheads and the cost driver (e. ... Cost pool = set-up costs, cost driver = no. of set-ups)
Once you know your cost pools and have established what drives them, you now calculate your ¡°Cost Driver Rate¡±
Example:
Activity Cost Pool Cost Driver Cost driver Rate
Set-Up 900,000 no. of set-ups 900,000
600 600
=1500 per set up
After calculating the cost driver rates for all you cost pools you then allocate the overheads to each product. ...
¡°Activity Based Costing recognises that it is activities which cause
cost, not products, products consume activities¡±
(T.
Approximate Word count = 1322
Approximate Pages = 5.3
(250 words per page double spaced)
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