Answer:
Explanation:
DIFFERENCES BETWEEN ACTIVITY-BASED (ABC) AND SIMPLE COSTING SYSTEMS
The major differences relate to the two-stage allocation process. In the first stage, simple costing system allocates indirect costs to cost centers (normally departments), whereas activity-based systems allocate indirect costs to cost centres based o activities rather than departments. Since there are more activities than departments a distinguishing feature is that activity-based system will have a greater number of costs centres in the first stage of the allocation process. in the second stage, simple costing system uses a limited number of different types of second stage volume based and non-volume-based cause-and-effect second stage drivers.
SIMPLE COSTING SYSTEM CAN PROVIDE MISLEADING INFORMATION FOR DECISION MAKING DECISIONS
The system tends to rely on arbitrary allocations of indirect costs, they rely on volume-based allocations. If volume-based allocation is used, high volume products are likely to be assigned with greater proportion of indirect cost than they have consumed, whereas low volume products will be assigned will be assigned a lower proportion. in these circumstances simple costing system will over cost high volume products and under costs low volume products. In contrast ABC system recognize that many indirect costs vary in proportion to changes to changes other than production volume.by identifying the cost drivers that cause the costs to change and assigning cost to cost objects on the basis of cost driver usage, costs can be more accurately traced . it is believed the cause-and effect relationship provides a superior way of determining relevant costs.
FOUR STAGES INVOLVED IN DESIGNING ABC
• identify the major activities that take place in an organisation
• Create a cost centre/cost pool for each activity
• Determine the cost driver for each major activity
• Trace the cost of activity to the product according to a products demand (using cost drivers as a measure of demand) for activities
ABC COST HIERARCHY
ABC cost hierarchy classifies activities along a cost hierarchy consisting of unit-level, batch-level, product sustaining, and facility-sustaining product. Unit level activities are performed each time a unit other product or service is produced. Examples include direct labour costs. Batch level activities are performed each time a batch is produced. Examples include setting up a machine or processing a purchase order. product sustaining activities are performed to enable the production and sale of individual product. Examples include the technical support provided for individual products and the resources required for performing product enhancement. Facility sustaining activities are performed to support the facility’s process. They include general administrative staff.
ABC PROFITABILITY ANALYSIS HIERARCHY
Categorizes costs according to their variability at different hierarchical levels to report different hierarchical contribution level. At the final level,
Facility or business-sustaining costs are deducted from the sum of product contributions to derive a profit at a business level unit.
The aim is to assign all organizational expenses to a hierarchical or organizational level where cause-and-effect cost assignment can be established so that arbitrary apportionments are non-existent.
