Chapter 2 ACTIVITY BASED COSTING (12)

ACTIVITY BASED COSTING (ABC)

QUESTIONS
Question No. 1

Muntazim Limited produces three products. Its budget for the year ending 30 June 2016 depicts the
following:
X Y Z
Sales volume Untis. 840,000 660,000 520,000
Sales Rs. 140,000,000 200,000,000 250,000,000
Cost of raw material per unit of production Rs. 60 110 180
Direct labour hours per unit 0.5 1.0 1.5
Machine hours per unit 0.1 0.2 0.3
Material requisitions to be issued per day number 5 3 2
Inspection time per unit minutes 12 15 20
% of units to be inspected - 1% 2% 4%
Average time taken to process a sales order Hours 5 10 15
Average size of the sales order Units 20,000 12,000 10,000
Opening inventory Units 60,000 50,000 40,000
Closing inventory Units 20,000 90,000 120,000

Other related information is as under:

(i) Manufacturing overheads are estimated at 50% of direct labour cost. Labour rate is Rs. 50
per hour. Manufacturing overheads represent the cost of Production department (40%),
Quality control department (30%), Materials management department (20%) and
Engineering department (10%).

(ii) Total administration and selling expenses are budgeted at Rs. 40 million. These represent
helad office costs (60%) and sales department costs (40%). Head office expenses are
allocated on the basis of sales value.

(iii) Cost of opening inventory per unit is the same as production costs for the budget period.

(iv) Units are inspected at the time of transfer to finished goods warehouse.

Required:
Prepare a product wise profit and loss account using activity based costing. (19)
(ICAP Module F, Sum-2015, Q.3)
Chapter 2 ACTIVITY BASED COSTING (13)

Question No. 2

RCL manufactures three products. Presently, overheads are allocated to each product on the basis of direct
labour hours. In order to determine the cost of products more accurately, RCL has decided to implement
Activity Based Costing for allocation of overheads.

The following data has been extracted from RCL’s budget for the next year:

Products X Y Z
Cost per unit: -------------Rupees -------------
Direct material @ Rs. 200 per kg 400 300 500
Direct labour @ Rs. 50 per hour 300 350 250
Other data:
Production units 50,000 40,000 25,000
Batch size units 500 250 250
Inspection time per batch hours 20 15 18
Economic order quantity (EOQ) kg 10,000 12,000 6,250

Details of factory overheads budgeted for the next year are as under:

Rs. in ‘000
Procurement department costs 2,500
Batch set up costs 3,600
Quality control department costs 4,510
Utilities 4,230
Salaries of supervisors and foremen 3,525
Salaries of cleaners and maintenance staff 1,410
Miscellaneous costs 705
Total 20,480

Required:
Compute product-wise cost per unit using Activity Based Costing. (12)
(ICAP Module F, Win-2012, Q.3)

Question No. 3

Super Autos (SA) manufactures components for auto industries. It started its business in 1960 in a small
workshop which has now developed into a fully automated factory with latest computerized machines.

For allocating overheads, SA has been using single plant-wide factory overhead absorption rate based on
direct labour hours. In view of strong competition, the company’s management is reviewing its pricing
strategies and wants to introduce a more accurate method of product costing.
Chapter 2 ACTIVITY BASED COSTING (14)

The pertinent information is as under:

(i) Actual expenses for the quarter ended 31 March 2012 were as under:
Rupees
Direct wages (30,000 labour hours) 3,000,000
Machines operating expenses (50,000 machine hours) 2,500,000
Maintenance expenses 1,500,000
Technical staff expenses 2,000,000
Expenses of procurement 1,000,000
Expenses of finished goods stores and dispatch 1,600,000
Administration and selling expenses 5,000,000
Total 16,600,000
(ii) During the quarter:
 60 purchase orders were processed and received.
 120 sales orders were acquired and delivered.
 150 batches were set for production.

(iii) Maintenance expenses pertain to:

Production 70%
Procurement 5%
Finished goods stores and dispatch 15%
Quality control 10%
(iv) It is estimated that Technical staff devotes 50% of its time to maintenance, 30% to production, 8%
to quality control and 12% to procurement.
(v) Quality inspection is carried out at the commencement and completion of each batch.
(vi) SA produces a number of components. Information related to two major products of the company,
for the quarter ended 31 March 2012 is as under:
LV MV
No. of units produced and sold 10,000 12,000
Batch size (no. of units) 400 500
Machine hours per batch 200 150
Direct labour hours worked 1,000 1,500
Direct material costs (Rs.) 850,000 900,000
Average size of a purchase order (Rs.) 170,000 150,000
No. of sales orders delivered 8 10

Required:
Compute the unit cost of components LV and MV using:
 Activity Based Costing; and
 A single factory overhead rate based on direct labour hours (20)
(ICAP Module F, Sum-2012, Q.5)
Chapter 2 ACTIVITY BASED COSTING (15)

Question No. 4
XYZ Ltd presently uses a single plant wide factory overhead rate for allocating factory overheads to products,
based on direct labour hours. A break-up of factory overheads is as follows:
Factory overheads
Production Support 1,225,000
Others 175,000
Total cost (Rs.) 1,400,000
It now plans to use activity-based costing to determine costs of its products. The company performs four
major activities in the Production Support Department. These activities and related costs are as follows:
Production Support Activities Rupees
Set up costs 428,750
Production control 245,000
Quality control 183,750
Materials management 367,500
Total 1,225,000
The planning department has gathered the relevant information which is given below:
Direct No. of
Batch Machine Inspections
Production labour Material
Products size hours hours per
in units hours per requisitions
(units) per unit unit
unit raised
Product X 10,000 2.5 125 7.50 0.2 320
Product Y 2,000 5.0 50 10.00 0.5 400
Product Z 50,000 2.8 10,000 3.00 0.1 30
The quality control department follows a policy of inspecting 5% of all production in case of X and Y, 2% of
all units of Z.

Required:
Determine the factory overhead cost per unit for Products X, Y and Z under:
a. Single factory overhead rate method.
b. Activity Based Costing. (18)
(ICAP Module F, Sum-2009, Q.7)
Question No. 5

The following budgeted information of AJFA Limited for the year 2005 is provided to you:
DVD Player TV Set Hi-Fi System
Sales and production (units) 50,000 40,000 30,000
Selling price (per unit) Rs. 4,500 9,500 7,300
Prime cost (per unit) Rs. 3,200 8,400 6,500

Hours Hours Hours

Machine department (machine hours per unit) 2 5 4
Assembly department (direct labour hours per unit) 7 3 2
Chapter 2 ACTIVITY BASED COSTING (16)

Recovery of overhead allocated and apportioned to machine and assembly departments including service
centre costs is to be made at the following rates:
Machine department at Rs.120 per machine hour
Assembly department at Rs. 8.25 per direct labour hour
The details of the overheads for the year are as follows:
Rs. ‘000’
Machining services 35,700
Assembly services 31,800
Set-up costs 2,600
Order processing 15,600
Purchasing 8,400
94,100
You have also been provided with the following estimates:
DVD TV Set Hi-Fi
Player System
Number of set ups 120 200 200
Number of orders by the customers 8,000 8,000 16,000
Number of orders to the suppliers 3,000 4,000 4,200

Required:

(a) Prepare product-wise income statements using:

- Absorption costing
- Activity based costing (19)

(b) Briefly comment on the difference between the results obtained under the above alternatives. (03)
(ICAP Module F, Win-2005, Q.5)
Question No. 6

What is Activity Based Costing (ABC)? Explain it with examples. Also narrate the mechanism, advantages
and disadvantages of ABC. (15)
(PAC)
Chapter 2 ACTIVITY BASED COSTING (17)

ANSWERS
Answer To Question No. 1

ICAP Examiner Comments

This question required allocation of production and other costs, using activity based costing and preparation
of product wise profit and loss account. Overall performance in this question was good. However many
students made different types of errors as discussed below:

 Many students did not differentiate between cost of sales and selling and administrative expenses.
They included selling and administrative costs in the per unit cost calculations.
 Many students used sales as basis of computation of cost rather than production.
 Some students computed production incorrectly by taking opposite effects of opening and closing
inventories.
 Production department’s costs were allocated on the basis of units of production instead of labour
hours.
 Quality control costs were allocated on the basis of number of units inspected or time required for
inspection per unit instead of total time required for inspection.
 Cost of material management was allocated on the basis of material cost instead of number of
requisitions.
 Cost of engineering department was allocated on the basis of labour hours instead of machine hours.

Answer (Solution by ICAP)

Allocation of production cost on the basis of production units to compute per unit cost

MUNTAZIM LIMITED

PRODUCT WISE PROFIT AND LOSS ACCOUNT

X Y Z Total
Rs. Rs. Rs. Rs.
Sales 140,000,000 200,000,000 250,000,000 590,000,000
Cost of sales (W-1) (83,823,664) (120,457,197) (152,022,265) (356,303,126)
Admin and selling costs (W-2) (7,876,733) (13,849,879) (18,273,388) (40,000,000)
Net profit 48,299,603 65,692,924 79,704,347 193,696,874
Chapter 2 ACTIVITY BASED COSTING (18)

W-1: Cost of goods sold

Sales in units 840,000 660,000 520,000

Add: Closing inventory 20,000 90,000 120,000
Less: Opening inventory 60,000 50,000 40,000
Production in units 800,000 700,000 600,000 2,100,000
Raw material cost
(Production × per unit) (A) 48,000,000 77,000,000 108,000,000
Labour hours per unit 0.5 1.0 1.5
Labour cost per unit 25 50 75
Total labour cost
(Production in units × cost per unit) (B) 20,000,000 35,000,000 45,000,000 100,000,000
Total manufacturing overhead (50% of 50,000,000
direct labour)
Total Labour hours 400,000 700,000 900,000 2,000,000
*Allocation of Production department
cost i.e. Rs. 50,000,000 × 40% in the
ratio of labour hours (C) 4,000,000 7,000,000 9,000,000 20,000,000
*Can be allocated on the basis of machine hours
Basis of inspection 1% 2% 4%
No. of units inspected (Production × 8,000 14,000 24,000
basis)
Minutes per inspection 12 15 20
Total inspection time (hours) 1,600 3,500 8,000 13,100
Allocation of Quality control department
cost i.e. (50,000,000 × 30%) in the ratio of
total inspect time (D) 1,832,061 4,007,634 9,160,305 15,000,000
Material requisitions issued per day 5 3 2
Allocation of Material Management
department i.e. Rs. 50,000,000 × 20% in
the ratio of material requisitions per day
(E) 5,000,000 3,000,000 2,000,000 10,000,000
Machine hours per unit 0.1 0.2 0.3
Total machine hrs (Production × per unit 80,000 140,000 180,000 400,000
machine hrs)
Allocation of Engineering department cost
i.e. Rs. 50,000,000 × 10% in the ratio of
machine hours (F) 1,000,000 1,750,000 2,250,000 5,000,000
Cost of production A to F 79,832,061 127,757,634 175,410,305
Cost per unit 99.79 182.51 2 92.35
Cost of sales 83,823,664 120,457,197 152,022,265 356,303,126
Chapter 2 ACTIVITY BASED COSTING (19)

W-2: Administrative costs

X Y Z Total
Average size of the sales order 20,000 12,000 10,000
Number of orders processed
(sales volume ÷ average size) 42 55 52 149
Average time to process a sales order - 5 10 15
hrs
Total time to process sales orders 210 550 780 1,540
Allocation of head office costs i.e. Rs.
24,000,000 in the ratio of sales value (G) 5,694,915 8,135,593 10,169,492 24,000,000
Allocation of sales department costs i.e.
Rs. 16,000,000 in ratio of no. of
processed orders (H) 2,181,818 5,714,286 8,103,896 16,000,000
Administrative and selling costs (G+H) 7,876,733 13,849,879 18,273,388 40,000,000

Answer To Question No. 2

ICAP Examiner Comments

This was quite a simple question based on activity based costing. The overall response to this question was
quite satisfactory; however, only about 3% of the students could secure full marks. Most of the students made
simple mistakes and lost easy marks. These are described below:

• Procurement department costs were to be allocated on the basis of number of purchase orders which
should have been computed by dividing the raw material consumption with the Economic Order
Quantity (EOQ). Instead, many students computed the number of purchase orders by dividing the
production with EOQ.
• Some students did not compute the number of batches and/or Inspection hour. Instead, they
allocated the costs of batch set up and quality control department on the basis of total production.
• Some students also erred in selecting the basis of allocation of utilities, salaries of supervisors and
foreman, salaries of cleaners and maintenance staff and miscellaneous expenses.
Answer (Solution by ICAP)
RCL
X Y Z Total
Production Units A 50,000 40,000 25,000
Cost allocation by activity:
1. Procurement department
Direct material cost per unit at B 400 300 500
Rs. 200 per kg.
Raw material consumption - kg B/200*A C 100,000 60,000 62,500
EOQ - kg D 10,000 12,000 6,250
No. of purchase orders C/D 10 5 10 25
Procurement department cost E 1,000 500 1,000 2,500
Chapter 2 ACTIVITY BASED COSTING (20)

2. Batch set up cost

Batch size F 500 250 250
No. of batches A/F G 100 160 100 360
Batch set-up costs H 1,000 1,600 1,000 3,600
3. Quality control department
Inspection hours per batch J 20 15 18
Inspection hours G*J K 2,000 2,400 1,800 6,200
Quality department costs L 1,455 1,746 1,309 4,510
4. Other overheads
Direct labour cost per unit M 300 350 250
Direct labour hour per unit M/50 N 6 7 5
Total direct labour hours A*N O 300,000 280,000 125,000 705,000
Utilities 1,800 1,680 750 4,230
Salaries of supervisors and 1,500 1,400 625 3,525
foreman
Salaries of cleaners and 600 560 250 1,410
maintenance staff
Miscellaneous expenses 300 280 125 705
P 4,200 3,920 1,750 9,870
Total costs Rs.000 (E+H+L+P) R 7,655 7,766 5,059 20,480
Cost per unit using ABC:
Direct material 400.00 300.00 500.00
Direct labour 300.00 350.00 250.00
Factory overheads R/A 153.10 194.15 202.36
Total Rs. 853.10 844.15 952.36

Answer To Question No. 3

ICAP Examiner Comments

This was a simple question on activity based costing. Most of the students were able to secure good marks.
The important observations of the examiner are as follows:
 Some candidates could not comprehend the fact that the total expenses for the quarter pertained to
the entire activity whereas product-wise data was available for 2 main products only. Consequently,
they tried to allocate the entire amount of expenses to the two products.
 Quite often, the admin and selling expenses were included in factory overheads.
 Many students carried out unnecessarily lengthy calculations, for example, instead of allocating total
cost of the various departments to the products in one step, they allocated each and every cost
individually and hence wasted a lot of their valuable time.
Chapter 2 ACTIVITY BASED COSTING (21)

Answer (Solution by ICAP)

Super Autos
LV MV
----- Rupees -----
Cost per unit under Activity Based Costing:
Direct raw material 850,000/10,000; 900,000/12,000 85.00 75.00
Direct wages (3,000,000/30,000) × 1,000/10,000 10.00
(3,000,000/30,000) × 1,500/12,000 12.50
Overheads 798,750/10,000; 715,883/12,000 (W-1) 79.88 59.66
174.88 147.16
Cost per unit under the single factory overhead rate based on direct labour hours:
Direct raw material 85.00 75.00
Direct wages 10.00 12.50
Overheads *(8,600,000/30,000) × 1,000/10,000 28.67
*(8,600,000/30,000) × 1,500/12,000 35.83
123.67 123.33
*(2,500,000 + 1,500,000 + 2,000,000 + 1,000,000 + 1,600,000) = 8,600,000
(W-1)
Overheads allocation to LV and MV based on ABC method: LV MV
Production 97 × A (W-3) & (W-2) 485,000 349,200
Procurement 22,750 × B 113,750 136,500
Finished goods stores and dispatch 16,458.33 × 8, 10 i.e. No. of sales orders 131,667 164,583
Quality control 1,366.67 × C 68,333 65,600
798,750 715,883
(W-2)
LV MV
Machine hours A (25 × 200) = 5,000 (24 × 150) = 3,600
No. of purchase orders B (850,000/170,000) = 5 (900,000/150,000) = 6
No. of quality inspections C (10,000/400 × 2) = 50 (12,000/500 × 2) = 48

(W-3)
F. goods
Quality
Computation of cost driver rate: Production Procurement stores &
control
dispatch
Machines operating expenses 2,500,000
Maintenance expenses; 1,500,000 × 70%, 5%,
1,050,000 75,000 225,000 150,000
15%, 10%
Technical staff expenses:
 Maintenance; (2,000,000 ×50%) × 70%, 700,000 50,000 150,000 100,000
5%, 15%, 10%
 Others; 2,000,000 × 30%, 12%, 0%, 8% 600,000 240,000 - 160,000
Procurement - 1,000,000
Finished goods stores & dispatch - - 1,600,000 -
Overheads by department 4,850,000 1,365,000 1,975,000 410,000
Cost drivers 50,000 300 (150 ×
60 Purchase 120 Sales
machine 2) Quality
orders orders
hours inspections
Cost per driver 97 22,750 16,458.33 1,366.67
Chapter 2 ACTIVITY BASED COSTING (22)

Answer To Question No. 4 (Solution by ICAP)

X Y Z Total
Number of units A 10,000 2,000 50,000
Direct labour hours per unit B 2.5 5.0 2.8
Direct labour hours (A× B)* C 25,000 10,000 140,000 175,000
Total factory overheads D 1,400,000
Factory overhead rate per hour (D/C) E Rs.8
Cost per unit-single factory overhead rate
method (B x E) F 20 40 22.40

Activity based costing

Set-up costs
Batch size G 125 50 10,000
Set-ups (A ÷ G) H 80 40 5 125
Set-up costs J 274,400 137,200 17,150 428,750

Production control
Machine hours per unit K 7.5 10.0 3.0
Total machine hours (A × K) L 75,000 20,000 150,000 245,000
Production control M 75,000 20,000 150,000 245,000
X Y Z Total
Quality control Allocation
No. of inspections N 5% 5% 2%
Units inspected (A × N) P 500 100 1,000
Hours per unit inspected Q 0.2 0.5 0.1
Total inspection hours (P × Q) R 100 50 100 250
Quality control costs S 73,500 36,750 73,500 183,750

Materials management
No. of requisitions T 320 400 30 750
Material management costs U 156,800 196,000 14,700 367,500

Factory overheads – General

Allocated on the basis of direct labour hoursV 25,000 10,000 140,000 175,000

Total cost (J+M+S+U+V) W 604,700 399,950 395,350 1,400,000

Factory overhead cost per unit – activity

based costing (W ÷ A) Rs. 60.47 199.98 7.91

*NOTE BY PAC
As total direct labour hours and other FOH cost are the same number, therefore, redistribution of other
FOH cost not specifically disclosed. Adjusted within the calculation.
Chapter 2 ACTIVITY BASED COSTING (23)

Answer To Question No. 5

(a) Product Wise Income Statement

Absorption Costing
……….….………….Rupees in ‘000’…………………
DVD TV Hi-Fi Total
Player Set Systems
Selling price (W-1) 225,000 380,000 219,000 824,000
Less: Cost of sales:
Prime cost (W-2) 160,000 336,000 195,000 691,000
Applied overhead (W-3) 14,888 24,990 14,895 54,773
174,888 360,990 209,895 745,773
Profit / (loss) 50,112 19,010 9,105 78,227

Under absorbed overheads cost (94,100- 54,773) (39,327)

38,900
Product Wise Income Statement
Activity Based Costing
……….….………….Rupees in ‘000’…………………
DVD TV Hi-Fi Total
Player Set Systems
Selling price (W-1) 225,000 380,000 219,000 824,000
Less: Cost of sales
Prime cost (W-2) 160,000 336,000 195,000 691,000
Machining services (W-4) 8,500 17,000 10,200 35,700
Assembly services (W-5) 21,000 7,200 3,600 31,800
Set up costs (W-6) 600 1,000 1,000 2,600
Order processing (W-7) 3,900 3,900 7,800 15,600
Purchasing (W-8) 2,250 3,000 3,150 8,400
196,250 368,100 220,750 785,100
Profit / loss 28,750 11,900 (1,750) 38,900

Workings Notes

(W-1) SELLING PRICE Rs. in ‘000’

DVD Player 4,500 x 50,000 225,000
TV Set 9,500 x 40,000 380,000
HiFi Sytem 7,300 x 30,000 219,000
824,000
(W-2) PRIME COST
DVD Player 3,200 x 50,000 160,000
TV Set 8,400 x 40,000 336,000
HiFi System 6,500 x 30,000 195,000
691,000
Chapter 2 ACTIVITY BASED COSTING (24)

(W-3) APPLIED OVERHEADS (ABSORPTION COSTING)

DVD TV Hi-Fi
Player Set Systems
Machining deptt.
(50,000 x 2 x 120) 12,000
(40,000 x 5 x 120) 24,000
(30,000 x 4 x 120) 14,400

Assembly deptt.
(50,000 x 7 x 8.25) 2,888
(40,000 x 3 x 8.25) 990
(30,000 x 2 x 8.25) 495
_____ _____ ______
14,888 24,990 14,895

(W-4) MACHINING SERVICES

35,700,000/ [(2 x 50,000) + (5 x 40,000) + (4 x 30,000)]
Rs. 85 per machine hour.

(W-5) ASSEMBLY SERVICES

31,800,000 / [(7 x 50,000) + (3 x 40,000) + (2 x 30,000)]
Rs 60 per direct labour hour

(W-6) SET UP COSTS

2,600,000 @ 1.2 : 2 : 2

(W-7) ORDER PROCESSING COST

15,600.000 @ 8: 8: 16

(W-8) PURCHASING
8,400,000 @ 3: 4: 4.2

(b) DIFFERENCES IN RESULTS OBTANED

The income statements prepared under both methods i.e. absorption costing and activity based
costing show profit for each case. Absorption costing shows product-wise more profit than activity
based costing.

However, activity based costing is considered more meaningful. As it identifies processes which are
cost drivers for application of overhead which give a more reliable and meaningful picture as
opposed to absorption costing that uses arbitrary/random basis such as direct labor hours or
machine hours as basis of application/ allocation of overhead costs. Moreover, in absorption costing
overheads amounting to Rs. 39,327 remained unapplied as such product wise profit is overstated.
Chapter 2 ACTIVITY BASED COSTING (25)

Answer To Question No. 6

What is ABC?

Definition:

Activity-based costing (ABC) is an approach to costing and monitoring of activities which involves
identifying the activities that are responsible for the generation of costs.

The essential principles of ABC are that:

 Activities (not products) generate costs
 Products consume activities.

Definition: An activity is a process which adds value and consumes resources.

Definition: A cost driver is any factor which causes a change in the cost of an activity
Examples of cost drivers
The following are examples of cost drivers.
Activity Cost driver
Material procurement No. of purchase orders
Material handling No. of movements
Quality control No. of inspections
Engineering services No. of change orders
Maintenance No. of break-downs
Line set-up No. of set-ups
The Mechanics of ABC
The mechanics of operating an ABC system are similar to a traditional absorption costing system, but the
results achieved can be very different.
The application of ABC involves a set procedure:
 The recording of costs, as normal
 Allocation of overheads to form cost pools associated with each ‘value adding’ activity.
Definition: A cost pool results from the pooling or accumulation of overhead cost which relate to a specific
activity.
For example all the overheads associated with the inspection process would together form a cost pool:
Steps Involved In ABC
 Identification of Activities / Cost Pools and computation of total cost for each cost pool
 Identification of cost drivers and cost driver volume
 Linking each cost driver to concerned cost pool
Chapter 2 ACTIVITY BASED COSTING (26)

 Determination of cost driver rates (the value of the cost pool/driver volume). This is the equivalent
of an absorption rate under conventional absorption costing systems
 Recovery and charging of overhead to product/ service based upon the demand for the activity.
Advantages of ABC

(a) The perceived benefit of introducing an activity – based costing system is that the unit costs should
more accurately reflect the activities performed and therefore the resources used.

(b) An improved more accurate product cost may enable a company to concentrate on a more profitable
mix of products or customers. ABC has been effectively used in identifying customers who are
unprofitable to service and products which are unprofitable to produce.

(c) It helps identify those activities that add more to value than cost, so that the non-value added items
can be appraised effectively with a view to elimination. As such it forces managers and supervisors to
consider the drivers that affect cost and what these drivers contribute to the final product.

(d) By focusing attention on cost drivers managers will have a better understanding of the costs of
production and the costs of the activities performed by the company.

Disadvantages of ABC

(a) ABC is a relatively new technique and as such management are not familiar with its principles and
methods and as such may be reluctant to introduce the system. A recent survey commissioned by
ACCA showed that only 4% of firms had actually adopted ABC.

(b) It is a more complex and costly technique to set up and operate than conventional costing system –
this is also likely to make management reluctant to adopt ABC.

(c) It has been pointed out by several authors that that ABC is unlikely to relate all overheads to specific
activities. It also ignores the potential for conflict, especially where there is more than one potential
cost driver. A fundamental problem in operating an ABC system is to identify what the cost driver is,
for a given cost pool.
Chapter 2 ACTIVITY BASED COSTING (27)

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Chapter 2 ACTIVITY BASED COSTING (28)

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