International Journal of Applied Finance For Non-Financial Managers (ISSN: 1742-528X) Volume 1 Issue 2
The purpose of this short paper is to examine, compare and contrast conventional method of overhead recovery with that of an activity based management approach. It will be of interest to the non-financial manager who needs to understand the language and methodology of this technique applied by strategic management accountants.
Students of management accounting and the non-financial manager, pursuing a CPD programme are faced with a whole new language which surrounds costing and managerial finance methods and techniques. Terms such as Activity Based Costing, Target Costing, Activity Based Accounting and Total Quality Management all add to the students’ financial vocabulary.
To the student of accounting and the non-financial manager much of this terminology may seem daunting. However, when we examine these methods and techniques we find that the practical aspects of the concepts “come alive” and the reader experiences what becomes for many an exciting journey.
In this paper I will focus on Activity Based Costing, or as it is more commonly referred to “ABC”. This technique re-examines the problem that has faced accountants for decades – that of the allocation and absorption of overhead.
Traditional pricing method has been based upon absorption costing and the treatment of overhead usually followed a set procedure.
Such method may successfully be used where there is a limited product range and predetermined rates are well planned on achievable production budget volumes.