Activity Based Costing in Cost Accounting

Activity-Based Costing is a particular type of cost accounting methodology. Cost accounting in turn, is a subset of Management Accounting. Management Accounting has an internal focus, as it is intended for use by management in decision making. The internal focus of Management Accounting contrasts with that of financial accounting applies generally accepted accounting principles to create statements intended for third parties outside the organization.

Management Accounting techniques, in contrast, use information from different disciplines including accounting and from multiple sources to assist management with internal problem solving. Here, we can understand that management accounting techniques may well differ from generally accepted accounting principles and these techniques will also differ from one organization to another. As a result they do not follow to any particular set of rules, a great deal of philosophical flexibility is left to the organization decision makers.

Cost accounting allows measurement and provides cost information. The more specific the unit of service in question, the more complex is cost measurement. It is far easier to determine the total costs of a specific unit of service, such as particular lab test. That includes the tracing and measurement of costs is one the difficult and the most important tasks for heath care organizations.

The concept of Activity-Based Costing

Activity-Based Costing has two major elements-cost measures and performance measures. Activity-based costing is a methodology that measures the cost and performance of activities, resources and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use. Activity-based costing recognizes the casual relationships of cost drives to activities. The basic concept of ABC is that activities consume resources to produce an output. Expenses should be separated and matched to the level of activity that consumes the resources. Specifically, the expenses that are needed to produce should be separated from the expenses that are incurred to produce different products or services or to serve different payers. This separation should be independent of how many units are produced or sold.

The ABC approach differs from the traditional approach because of its fundamental concentration on activities .An ABC approach uses both financial and nonfinancial variables as bases for cost allocation. A typical ABC approach utilizes more indirect cost pools than does the traditional approach and uses a greater number of cost drivers as cost allocation bases.

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