Financial Accounting: Activity-Based Costing, Overhead Allocation, Breakeven Point Calculation

Running head: FINANCIAL ACCOUNTING
Financial Accounting
Name of the Student
Name of the University
Author Note

1FINANCIAL ACCOUNTING
Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................3
Answer to Question 3......................................................................................................................4
Answer to Question 4......................................................................................................................4
References........................................................................................................................................4

2FINANCIAL ACCOUNTING
Answer to Question 1
Activity -Based-Costing (ABC) is the method of accounting that helps in the identification of
the activities of the organization and based on that allocates the overhead expenses to each of its
product. A methodology builds a relationship between cost activities and products to increase the
accuracy of its production. The benefits of this process of costing are as follows:
 The ABC stresses on the organizational activities that could benefit most from the
process improvement tools like Six Sigma.
 It improvises the product accuracy by increasing the number of cost pools that are to
gather the indirect cost.
 This methodology uses the cost pools that are more Homogenous than the cost pools in
the departments which again helps in enhancing the accuracy of the product
 The activity costing stresses on the activities of the business to assign the overheads,
therefore the sole cause of those costs are measured rather than depending solely on the
direct labor hours.
 There is a better understanding of the individual activities and facilitates comparison.
However, this approach of cost accounting has some limitations that can be jotted down as
follows:
 The cost of implanting the ABC system is comparatively higher than its benefits. The
various data are needed to be collected and it requires substantial resources to carry on
with the process, thus costly to maintain.
 The approach is used only when the products differ in volume, batch size and in
activities. If the situation is different, ABC is not worth the cost.