Page 29 - Microsoft Word - 00 Prelims.docx

Advanced Costing Methods

Reasons for the development of ABC

1 Size/proportion of overheads
 Overheads used to be small in relation to other
costs in traditional manufacturing.

 Production overheads, such as machine
depreciation, used to be a small proportion of
overall costs because production was more
labour intensive.
 Direct costs would have been much higher than
indirect costs. A rough estimate of the production
overhead per unit was therefore fine.

Three key
reasons
Four
2 Modern manufacturing 3 Complexity/diversity

 Overheads are now a larger  The nature of manufacturing
proportion of total costs in modern has changed.
manufacturing.
 Many companies must now
 Manufacturing has become more operate in a highly competitive
machine intensive and, as a result, environment.
the proportion of production
overheads, compared to direct  As a result, the diversity and
costs, has increased. complexity of products has
increased.
 Therefore, it is important that an
accurate estimate is made of the  Not all production overheads
production overhead per unit. are driven by level of activity.

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