This topic introduces an alternative approach to understanding cost called Activity based costing. This idea was generated because the fundamental assumption that cost is always driven by volume isn’t always correct. An example of this is batch costs.
Diversity and complexity adds costs irrespective of the volume. If an organization that only produces blue ink pens decides to diversify its product range and offer black and red ink pens there will be an increase in cost regardless of the volume produced.
Sometimes the whole strategy of an organization can be distorted on incorrect accounting information and therefore it is important to consider different ways to understand costs.
Topic 7: Costing Products and Services
After studying this topic students will be able to:
Explain why managers need estimates of the costs of both responsibility centres and products;
Describe the basic principles for estimating responsibility centre and product costs;
Explain the problems that arise in estimating the indirect costs of responsibility centres and products;
Describe how to estimate a product’s indirect costs using a business-wide overhead rate or departmental overhead rates and evaluate these approaches;
Explain how to use activity-based costing to assign costs to products;
Calculate the costs of products using activity-based costing; and
Assess when it is appropriate to use activity-based product costing.
