ACTIVITY BASED COSTING
The Activity-Based Costing concept refers to a different way of accounting for manufacturing activities. It pays attention to activities performed to manufacture a product. Costs are associated with the activities and not directly to products. It works on the assumption that costs emanate from activities and that activities result in costs and products are produced based on activities. Each product requires a certain set of activities and thus each activity becomes a cost for producing that product.
The traditional method of assigning costs to products entails assigning costs to organisational units such as a particular department within the organisation or to a plant. Under the Activity Based Costing system works on the principle and every activity consumes resources and hence a cost is incurred. Thus Activity Based costing has gained more popularity as it is considered more appropriate and logical as opposed to the traditional approach which over simplifies cost allocation. In traditional accounting two activities might be requiring the same level of direct costs but the difference in requirement of overheads like marketing costs may be different.
The approach to Activity Based Costing begins with identifying each activity which goes into producing various products. Costs are assigned to each of these activities and then the cost of products is determined based on which activity they require. For example a product which is mass based would use equal amount of labour and raw materials as a customised product. However a product which is customised may require more marketing or engineering time. This delta does not get accounted for in the traditional costing system. In-fact as a company expands its portfolio of customised products; the activity based costing system would provide a better picture of the company's financials as indirect costs are allocated more accurately.
Difficulties encountered in writing Activity Based costing assignment/assessments?
Activity based cost accounting assignments are usually lengthy and time consuming as they involve collating analysing, demarcating and assigning costs. Cost accounting is a subset of the diverse field of accounting and helps assessing costs associated with production. This information is ultimately used by the management in exercising cost control and manages the same in the future and hence is complex in nature.
Activity Costing Based system requires some amount of rethinking as one has to keep aside what they have learnt in the traditional form of accounting. Students need to break down the business activities into separate components and many find it difficult to analyse and create demarcations for the same. The information required for segregating activities is not readily given in the problems as is the case in real life scenarios and students really need to apply their minds well to get past this stage and move ahead in creating the assignment solution.
This forms the basis of costing system and hence if students are not clear with their concepts at this stage they could go wrong entirely. Once activities are identified the next step would be to allocate costs to the same and this too would require precision. Assignments under this subject would entail such problems are students are being trained to deal with real scenarios in the corporate world.
Calculations are just one aspect of any accounting assignments, understanding the theories and applying the correct concepts go a long way in making sure that students are calculating using the relevant and right numbers.
Further, many a times students are expected to work on software and the skills pertaining to the same need to be learnt. Notably many students, who haven't taken accounting as a core subject initially like those from the science background, find it difficult to solve assignments independently.
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