Activity Based Costing and the Theory of Constraints Are, Respectively, Overhead Absorption Costing and Marginal Costing in a Different Guise

2425 Words Nov 5th, 2008 10 Pages

Module Code MG2134
Module Title Management Accounting
Module leader Tony Tollington

Student ID number 0617484

Degree Programme (e.g. Business and Management (General)) Business Management and Accounting

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ABC works on the bases of absorption costing but more detailed therefore more useful in decision making. It was developed in USA in the manufacturing sector throughout 1970’s and 1980’. It came about, as overheads incurred in organisations became more activity-related rather than volume-related., which is a result of more advanced technology used in manufacturing sector and increased global competitiveness, therefore traditional costing systems mainly including overhead absorption costing, became to some extent obsolete. The method is based on traditional absorption costing, therefore uses the same two stage process of allocation
‘Activity based costing assigns cost to activities based on the consumption of resources. These costs are then assigned to products or services on the basis of their use of these activities’ (ABC v TOC: Same cloth as absorption v marginal, different style and cut? – Tony Tollington; Apr 1998). Activities can include such as production planning, maintenance, ordering, material handling, production set-up and other related activities. Activities include aggregation of many different tasks and are described by verbs associated with objects. (Management and Cost Accounting; Colin Drury, 6th edition, pg72) ABC acknowledges those activities and their use of

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