Chapter 1: Activity Based Costing (ABC)
Understanding overheads, cost drivers, and fair allocation methods.
About this Lecture
In this session, we break down the fundamental flaws of traditional absorption costing and introduce Activity Based Costing (ABC) as a modern solution. You will learn how to identify cost pools, select appropriate cost drivers, and calculate more accurate product costs.
Study Guide Highlights
1. Understanding Overhead Costs
Overhead costs (indirect costs) cannot be traced directly to a specific product. Examples include rent, electricity, and supervisor salaries. Unlike direct materials or direct labour, these must be allocated.
2. The 3 Categories of Production Costs
- Direct Materials: Traced to specific product (e.g., wood).
- Direct Labour: Traced to specific product (e.g., assembly workers).
- Overheads: Cannot be traced – must be allocated.
3. Exam Tips & Key Takeaways
When asked, state the direction (over/under costed), identify the products affected, and explain WHY (volume vs activity).
Consider overhead proportion, product diversity, complexity, and cost vs benefit of implementation.
Chapter Resources
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