Activity Base Costing Concept



Activity Base Costing Concept

Introduction

A financial analyst is supposed to undertake different accounting techniques to analyze accounting figures. The accounting treatment of cost is very complex and has financial significant. The Chartered Institute of Management Accountants (CIMA) defines cost accounting as a process of accounting for costs from the point at which its expenditure is incurred or committed to the establishment of the ultimate relationship with cost units. The cost accounting assist management in gathering information required to take various decisions. The cost accounting has multiple purposes and categorize as management accounting or internal accounting. The multiple purposes also overlapped with each other. There are certain objectives of cost accounting such as determining selling price, determining and controlling efficiency. It also uses number of method to control the cost such as standard costing and budgetary control. The cost accounting methods are not only for controlling cost or assessing the amount of cost but also assist management in preparation of various financial statements such as balance sheet, income statement and statement of cash flow. Moreover, if there is an efficient cost accounting system than the presentation of financial statements will be more convenient. The cost accounting also helps management to make operating policies that are related to determining cost-volume-profit relationship, manufacture the product in-house or buy from outside supplier, keep operating the existing plant or replaced the plant with new modern plants (Boer, 1974). There are various types of costing system such as activity-based costing, life cycle costing, process costing, operation costing, job-order costing and back-flash costing. In this paper, I will focus on the activity-based costing concept and its implication in SAC. I will also elaborate the methodology and techniques of to develop activity-base accounting system.

Discussion

Activity Base Costing

The accounting concept name “Activity Base Costing” is pretty much defined by its name. Basically, it is costing based on activity. It is a system in which costs and staff timing are produced by breaking down every activity into its component parts to assess the amount of work and time involved. It helps in attributing cost to all activities within organization and measures amount of resources required to undertake specific part of work. Therefore, the activity-based accounting is a comprehensive method for determining accurate costs for each and every activity that is involve in manufacturing of particular product whether directly and indirectly. Among costing system the activity based accounting system is relatively recent and widely accepted by organizations worldwide (Willard, 1922).

In order to develop activity-base accounting system, we have to identify the relationship between activities, resources and service and product. Organization used to spend their resources on activities and the product or service is the outcome of these activities. Organization undertakes many operational activities to manufacture product and use different types of resources in these operational activities. The usage of these resources can be tracked in a way that which product or service consumes what amount of resources. The resources can be identified as direct labor cost or direct ...