Question

i) ‘Activity based costing is clearly a superior system to conventional product costing techniques. Hence, all organisations should adopt activity based costing’. Do you agree? Explain! (Maximum 200 words)

ii) Discuss the differences that exist between the three types of service entities. (Maximum 200 words)

iii) ‘The human reactions to the budgeting process can have a considerable influence on an organisation’s overall effectiveness.’ Discuss two ways in which human reactions to budgets can have a negative impact on organisational performance. (Maximum 200 words)

Answer 1

i)

I agree with this statement.

Activity Based Costing (ABC) is a costing method that measures the cost and perfomance of process related activities and cost objects. It attempts to allocate to the products and services, all the costs incurred in producing them including overhead costs. This method of costing, first of all identifies the activities that are being carried out in the organisation and allocates the costs to these activities. By then measuring the contribution of each of the activities to the products and services of the enterprise, it is possible to allocate the costs relating to each activity among the products or services which that activity is involved in producing. The intended result is that the costs are assigned to products on a rational basis and the profitability of eachproduct or service can be more accurately determined than any other costing system.