Activity Based Costing and Overhead Cost

Activity Based Costing and Overhead Cost

Activity Based Costing and Overhead Cost

Introduction

The study relates to activity based costing and overhead cost which allows to remove the defects of traditional cost accounting, consisting of settlement costs to cost objects in accordance with overhead costs. The reason for these deficiencies is the settlement of indirect costs by billing keys, based on production volumes or direct costs. Meanwhile, changes in the cost structure of companies significantly increasing the share of indirect costs in total costs, causes that the production volume or the direct costs less and less reflect causal relationships, occurring between indirect costs and facilities costs.

Discussion

Activity based costing is not just the cost of the settlement of their formation in the enterprise, but leads to more in line with reality (according to the actually setting a causal relationship) to assign costs, cost objects. Relevance model assumptions, activity based costing, and frailties of traditional cost accounting solutions have contributed to relatively rapid publicity and dissemination of this new concept, both among theorists and practitioners dealing with the costs of enterprises.

In addition to the extreme cases of complete abandonment of activity based costing many companies, practically applying it, expresses the opinion that it is difficult to maintain, update and expand. It is characterized by excessive static, which limits its usefulness in enterprises operating in a dynamic and changing environment. When applying the activity based costing and overhead cost, it is important that information on costs was accurate and readily available (this ensures their practical usefulness) and their preparation was not expensive (Ahmad, 2011).

Long time implementation of activity based costing

Data to develop the concept and subsequent updates thereof were collected on the basis of surveys, interviews with employees and management and follow-up. With the implementation of large scale projects lasted up to 12 months. Companies need tools that provide them as up to date reliable information on costs. Therefore, the 12 month time implementation of the new concept of cost accounting could be acceptable a few decades ago, but not satisfied with current management, pending ongoing monthly reports, or even weekly (Ballard and Kim, 2001).

The high cost of applying the ABC account

In areas of the company, which is dominated by personnel costs, activities were determined on the basis of additional records kept by employees, informing about the time employees dedicated to the execution of the actions. This additional information required proper treatment in case of very large units had to be hired to analysts and purchase software.

Subjectivity Information

Estimating the staff time spent on the execution of individual actions on the one hand irritated employees, which imposed additional responsibilities involving the settlement of the execution time of each action. On the other hand, management seen in these data for a large degree of subjectivity, which significantly reduced the reliability of the results of the use of activity based costing (Calvasina, Calvasina and Calvasina, 2011).

Phases of Activity Based Costing

Phase I

This is the most important step in the implementation of ...