ABC Costing Assumptions

ABC Costing Assumptions

ABC costing assumption may be explained in terms of change cost structure, large overheads cost, many new costs.

1.    Change of Cost Structure

ABC costing first assumption is change in cost structure of modern organizations.      The cost structure of organizations has changed. Typical cost structure main element i.e. direct labor does not form a major product costs any more.

2.    Large Overhead Cost

ABC costing second assumption is large overheads cost in modern organizations. In new cost structure, overheads cost are more than direct cost (labour & material).

3.    Many New Costs Emerged

ABC costing third assumption is emergence of new costs in production processes. Many of these costs do not relate to production activities like quality assurance cost or material handling cost. Therefore it is not appropriate to absorb these costs using production absorption rate.

4.    Old Absorption method is not representative

Old Absorbing method of overheads allocation may not be representative of actual cost incurred in the change scenario. There is need of more accurate allocation of cost. Therefore new absorption methods are required.