9706 · 4.1.1
Activity Based Costing
Welcome to our lesson on Activity Based Costing (ABC). In modern business, overheads can form a significant part of a product's total cost. Traditional methods of absorbing these overheads can sometimes be too simplistic, leading to inaccurate product costs and poor decisions. ABC offers a more sophisticated and accurate approach by linking overheads to the specific activities that drive them. In this lesson, we will explore how to apply ABC, understand its impact on business strategy, and evaluate its strengths and weaknesses.
Need to know
What you need to know
- **Problem with Traditional Costing:** It tends to over-cost high-volume, simple products (as they absorb a large share of overheads based on volume) and under-cost low-volume, complex products (which may cause many overhead activities but in small volumes).
- **The ABC Solution:** ABC refines this by recognising that many overheads are not driven by production volume but by specific activities. It allocates costs based on the consumption of these activities, providing a more accurate picture of what each product truly costs to produce.