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(BQ) Part 2 book “Management accounting” has contents: Overhead costing – activity-based costing; process and job costing, standard costing, variance analysis, capital expenditure, inventory and pricing decisions, performance measurement and evaluation. | Chapter 6 Overhead costing – activity-based costing Learning objectives Reference Overhead costing – activity-based costing LO6 Identify and apply the principles of activity-based costing to allocate overheads in organisations LO6.1 Topic list 1 2 3 4 5 6 The reasons for the development of ABC Outline of an ABC system Absorption costing versus ABC Marginal costing versus ABC Introducing an ABC system into an organisation Merits and criticisms of ABC 167 Introduction In this chapter we look at a costing system that has been developed to suit modern practices: activitybased costing. Basically, activity-based costing (ABC) is the modern alternative to traditional absorption costing. 168 Management Accounting Before you begin If you have studied these topics before, you may wonder whether you need to study this chapter in full. If this is the case, please attempt the questions below, which cover some of the key subjects in the area. If you answer all these questions successfully, you probably have a reasonably detailed knowledge of the subject matter, but you should still skim through the chapter to ensure that you are familiar with everything covered. There are references in brackets indicating where in the chapter you can find the information, and you will also find a commentary at the back of the Study Manual. 1 What are the reasons for the development of ABC? (Section 1) 2 Define ABC. (Section 2.1) 3 Explain the concept of cost drivers. (Section 3.2) 4 When should an ABC system be introduced? (Section 5.1) 5 What are product-sustaining activities? (Section 5.2) 6 What are facility-sustaining activities? (Section 5.2) 7 List the advantages of ABC. (Section 6.1) 8 Define customer profitability analysis. (Section 6.1) 9 List the disadvantages of ABC. (Section 6.2) 6: Overhead costing – activity-based costing 169 1 The reasons for the development of ABC Section overview • LO 6.1 Traditional costing systems, which assume .
