Briefly explain the concepts of Absorption costing and Activity Based Costing. Describe the implications for a Company if they decide to switch from Absorption costing to Activity Based costing and evaluate whether you believe the additional costs of Activity Based Costing
outweigh any potential benefits
Understanding ‘Cost Assignment’ is a key aim of the IDMA001 Management Accounting syllabi.
Absorption and Activity Based Costing is a corner stone to understanding cost assignment in the context of management accounting techniques.
Absorption costing is a costing methodology that traces the costs of all products and services to the periods in which they are used. This approach is also known as full absorption costing. In contrast, activity-based costing (ABC) assigns costs to products and services based on the activities that are required to produce them. ABC can be more accurate than traditional absorption costing because it identifies the specific activities that are driving costs.
In traditional absorption costing, all manufacturing costs are assigned to products and services. These include direct materials, direct labor, and overhead costs such as rent, utilities, and property taxes. The thinking behind this approach is that all manufacturing costs must be covered by the selling price of the product or service. Otherwise, the company will have to sell at a loss or go out of business.
While this may seem like a straightforward way to determine the cost of products and services,
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