Activity Based Costing

Broad averaging describes a costing approach that uses broad averages for assigning the cost of resources uniformly to cost objects

By ignoring the variation in the consumption of resources by different cost objects, broad averaging can lead to inaccurate product costing

An ABC approach attempts to use cost drivers as the allocation bas for indirect costs, whereas a simple costing system generally does not

means making changes to a simple costing system that reduces the use of broad average for assigning the costs of measures to cost objects and provides between measurement of the costs of overhead resources used by different cost objects

1 Classify as many of the total costs as direct costs as is economically feasible 2 Expand the number of indirect cost pools until each of these pools is more homogenous 3 Use the cause and effect criterion, to identify the cost allocation bas for each indirect cost pool

An activity based approach refines a costing system by focusing on individual activities as the fundamental cost objects. It uses the cost of these activities as the basis for assigning costs to other cost objects such as products or services

1 Output unit level costs 2 Batch level costs 3 Product sustaining costs or service sustaining costs 4 Facility sustaining costs

The measurements necessary to implement it require many calculations and can be cost to operate

Significant amounts of indirect costs allocated using only one or two cost pools Products make divers demands on resources because of differences in volume, process steps, batch size, or complexity.

1 Pricing and product mix 2 Cost reduction and process improvement 3 Product design 4 Decisions for planning and managing activities