Activity Based Cost Accounting Techniques

Activity Based Cost Accounting Techniques
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Activity Based Cost Accounting Techniques
Activity Based Cost Accounting refers to the techniques applied in cost accounting, where the costs involved in the production of goods and services are allocated based on the resources consumed by each activity involved in their production. The overhead costs are summed up for each of organizational activity, and then assigned to the respective products that demand those activities (Kisker, Chang & Schirmer, 2007). Therefore, under the Activity Based Cost Accounting Techniques, commonly known as ABC, overhead costs are allocated to the activities that cause the costs, and then those activities are assigned to the products that require them (Mayer, 2003). This way, the disadvantages associated with allocating overhead costs to products or services produced on the basis of machine hours are eliminated. Thus, under ABC techniques, it is possible to assess accurately the costs associated with each unit of a product or service produced, since such costs can be traced to the activities involved in their production, which have the overhead costs already allocated to them (Laura & Todd, 1998).
There are various techniques applied under Activity Based Cost Accounting. The techniques enhances accurate tracing and accounting for costs involved in the production of a unit product or service, as opposed to generalization of costs, where the total costs involved are divided among the units produced to give the cost per unit. The following techniques are used under ABA system.
Segregation of costs
This technique is applied to separate the costs involved in the production process, where the fixed costs, the variable costs and the overhead costs are accounted for differently. Through the separation of costs, it becomes possible to identify costs drivers. This refers to the unit activities that bring change in the costs of a particular production activity (Kisker, Chang & Schirmer, 2007). While the volume of output was initially considered as the sole cost driver, where the costs involved in the production process were accounted for on the basis of the volume of output, the desire to determine costs per unit product accurately have changed this. It was observed that, in addition to the volume of output, there were other indirect costs, such as maintenance costs, costs involved in material handling as well as inspection. These costs are not determined by the volumes produced, but rather by the time involved in such activities (Mayer, 2003). Without separating costs, it would not be possible to determine accurately the costs involved in the production of a unit product or service, since such indirect costs varies from one unit to the other. Therefore, with the segregation of all costs involved in the production process, it becomes possible to tell exactly which costs are involved in the production of unit products and services, and thus determine the cost of such a product with precision (Lindahl, 1997).
Determination, and Separation of unit activities
Under the Activity Based Co...