Management Accounting - ABC

ABC

(It's as easy as 123)

ABC stands for Activity Based Costing. It has a few benefits, such as:

• It provides more accurate costs for each unit of a product (or service)


• It gives a better understanding of the business to managers

It's fairly simple to the more traditional costing methods we've looked at already, but with a key difference: ABC looks at activities as a way of accumulating costs, instead of the old method of using cost centres. So with ABC the costs will be driven by:

Management Accounting - Costs On A Departmental Basis

Dealing with overhead costs on a departmental basis

In previous posts we've addressed what full costing is and how overheads can be applied in different ways. Now it's time to talk about how the overheads can be sorted into departments.

Think about a medium to large sized business. They are often separated into departments, for example, sales, customer service, manufacturing etc. So what if, when a product's cost is calculated, the overheads were allocated depending on how long the product spends in a certain department?

Instead of departments, we'll refer to the different business areas as cost centres. There can be two types of these:

Management Accounting - Fixed and Variable Costs

Fixed and Variable Costs

You'll remember from the previous post that there's more than one way to define cost. The methods were:

• Differential future cash flows (DFC)


• Cost behaviour in relation to output


• Assignment to cost object


• Financial statement perspective


• Business function

The previous post focused on DFC, and this post is about cost behaviour in relation to output. What's that in english? We're on about fixed and variable costs.