Essay on Case Study: Activity Based Costing

1450 Words Oct 4th, 2008 6 Pages
At a recent management meeting at Coverdrive Ltd, the members of the senior management team discussed the introduction of a new product to the company’s range of high quality, hand made cricket bats. A major agenda item was pricing. The management accountant, since his appointment, had given much thought to pricing policy and one of his concerns was that of dealing with the recovery of overhead within a full cost pricing policy.

The discussion centred around the traditional method currently in use, compared and contrasted with ABC, Activity Based Costing a technique which re-examines the problem that has faced accountants for decades – that of allocation and absorption of overhead.

Traditional pricing method has been based upon
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Such a mechanism forces managers to justify the purpose of all activities within an organisation.

Writers suggest that ABC was first used in the US in the early 1960’s. Others would say that it is a relatively new technique – particularly those consultants who are involved with selling the idea to management and plan and implement ‘in house’ systems for clients.

The early US experience centred on the allocation of selling and distribution cost.

Most texts agree that Cooper and Kaplan (C&K) brought the ABC technique to the fore and they are to ‘ABC’ as Merriet and Sykes were to investment appraisal. C&K have shaped the framework and influenced its use by practitioners.

ABC as with other management accounting techniques has its own terminology.

Terms such as ‘Activity’, ‘Cost Driver’, ‘Cost Pool’, and ‘Cost Driver Rate’ all have particular meanings.

An Activity is defined as “a value adding process which consumes resources”.

A Cost Driver is “an activity or factor which generates cost” for example in our business a cost driver could be inspections in the quality control function.

A Cost Pool is the “pooling of overhead cost which relates to a specific activity”.

For example the overheads associated with the inspection process in quality assurance would together form a ‘cost pool’.

And finally a ‘Cost

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