Activity Based Costing (ABC)

One of the basic parts of cost accounting is to gauge the cost of tangible or intangible product or service. All costing models are attempting to discover the "correct" cost 1.e actual cost without any cost variances for all cost objects, for example, product, profit, segment, and division. costing methodologies all over the world apportion overhead by utilizing volume- driven measure, for example, unit transformed to first gauge a foreordained overhead rate then assign overhead by applying this normal overhead rate to the cost object. Requisition of such models is authentic for offices generating goods with less differing qualities. In any case, as manufactured goods differ, the wide averaging methodology prompts severe cost variations (Johnson and Kaplan, 1987, Cooper and Kaplan, 1988).

A more refined overhead allocation system, for example, Activity Based Costing (ABC) plans to lessen these cost estimation mutilations by making various cost pools and allocation bases to apportion overhead to item or administration in two stages allocation procedure. One issue that identifies with the ABC framelabor is that the allocation methodology accepts a strict relative relationship between activity and cost. Noreen and Soderstrom (1994) test this straight corresponding suspicion by looking at the healing center's opportunity arrangement conduct of overhead costs and exercises. The effects demonstrate that the proportionality speculation might be rejected for the majority of the overhead records. On normal over the accounts, the normal cost for every unit of activity exaggerates marginal cost by in the ballpark of 40% and in some branches by over 100%. An alternate study directed by Noreen and Soderstrom (1997) prescribes that costing f...

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Johnson, H. & Kaplan, R (1987). Relevance Lost: the Rise and fall of Management Accounting, Harvard Business School Press, Boston, MA.

Cooper, R. & Kaplan, R (1988). "Measure Costs Right: Make the Right Decisions," Harvard Business Review, Sept-Oct, p.96-103

Noreen, E. & Soderstrom, N. (1994) "Are Overhead costs Strictly Proportional to Activity?" Journal of Accounting and Economics, vol.17 (1), p.255-278

Kim, K. & Hon, I (2008). "Application of a hybrid genetic algorithm and neural netlabor approach in activity-based costing," Expert Systems with Applications, vol. 24(1), January, p.73-77