The setting up of new cost pools is needed which is time-consuming. Hence, this method of assigning costs is more precise and reliable than estimating expenses or splitting the total cost equally. The choice of both activities and cost drivers might be inappropriate.ĪBC needs a new set of accounting records, this is often not immediately available and therefore resistance to change is common. COST DRIVER - DEFINITIONCOST DRIVER - DEFINITION An activity which generates costAn activity which generates cost A factor such as the level of activity or volumeA factor such as the level of activity or volume that causally affects cost.that causally affects cost. The cost manager can analyze these three different pools based on the cost drivers, and the total cost of 50,000 can be divided between the three pools. In a practical context, there are frequently difficulties in identifying the appropriate drivers.ĪBC costs are based on assumptions and simplifications. While ABC is likely to provide better information for decision makers, it must still be applied with care.ĪBC is not fully understood by many managers and therefore is not fully accepted as a means of cost control. The number of times materials are ordered, the number of. In general terms, an organisation which has little competition, a stable and standardised product range and for which overheads represent a small proportion of total cost, will not benefit from the introduction of ABC. Cost drivers are the actual activities that cause the total cost in an activity cost pool to increase. The need to analyse costs on a radically different basis will require resources, which will lead to additional costs.Ĭlearly the benefits which will be obtained must exceed these costs. There are four major issues to be considered:
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