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Emergence of Activity Based Costing

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Submitted By sevoftw13
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The Emergence of Activity Based Costing

The Traditional cost accounting methods were designed around 1870-1920 and in those days industry was labour intensive and there were no machinery. The product variety was small and the overhead costs in companies were generally low compared to today.

During the 1980s, it became clear the conventional techniques for recovering overheads were increasingly providing the management with cost information that was inaccurate and misleading. As a result new techniques for overhead recovery were needed. In order to produce a more accurate costing system, cooper and Kaplan in 1987 developed a more refined approach for assigning overhead to products and computing product costs and called this approach Activity Based Costing (ABC). It was first clearly defined as a chapter in their book Accounting and Management: A field study perspective. (Kaplan, Roberts 1987). While mainly used for private businesses, ABC has recently been used in public forums, such as those that measure government efficiency

Features of the ABC and Traditional costing system

Activity Based Costing can be defined as an accounting methodology that assigns costs to activities based on their use of resources, rather than products or services. This enables resources and other associated costs to be more accurately attributed to the products and the services which they use. It doesn’t change or eliminate any costs; it provides detailed information about how costs are consumed. (Online manager-net.com).

Traditional cost accounting looks at what is spent, while ABC methods look at what is done in terms of activities. In ABC it is much easier to identify opportunities to reduce costs and improve performance, while maintaining the quality of care provided.

Traditional Cost Systems use cost allocation methods, do not focus on where or why costs occur,...

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