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    FBC vs. Abc

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    Anum Naeem
    This document compares and contrasts functional based costing (FBC) and activity based costing (ABC). FBC focuses on functions like administration and assigns overhead costs using an arbitrary rate, while ABC focuses on activities like receiving materials and assigns costs using cost drivers. ABC is more accurate but also more complex than FBC. The main differences between the two are their focus, objectives, and how variances and standards are used.

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    © All Rights Reserved
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    FBC vs. Abc

    Uploaded by

    Anum Naeem
    400 views6 pages
    This document compares and contrasts functional based costing (FBC) and activity based costing (ABC). FBC focuses on functions like administration and assigns overhead costs using an arbitrary rate, while ABC focuses on activities like receiving materials and assigns costs using cost drivers. ABC is more accurate but also more complex than FBC. The main differences between the two are their focus, objectives, and how variances and standards are used.

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    This document compares and contrasts functional based costing (FBC) and activity based costing (ABC). FBC focuses on functions like administration and assigns overhead costs using an arbitrary rate, while ABC focuses on activities like receiving materials and assigns costs using cost drivers. ABC is more accurate but also more complex than FBC. The main differences between the two are their focus, objectives, and how variances and standards are used.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    400 views6 pages

    FBC vs. Abc

    Uploaded by

    Anum Naeem
    This document compares and contrasts functional based costing (FBC) and activity based costing (ABC). FBC focuses on functions like administration and assigns overhead costs using an arbitrary rate, while ABC focuses on activities like receiving materials and assigns costs using cost drivers. ABC is more accurate but also more complex than FBC. The main differences between the two are their focus, objectives, and how variances and standards are used.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    AB

    FBC vs ABC
    By: Anum Naeem
    This assignment Is about Activity based Costing and
    Functional Based Costing.

    MHRM-Previous-Section A

    Department of Public
    Administration

    Management Accounting

    University of Karachi

    25-Oct-17
    FUNCTIONAL BASED COSTING Vs. ACTIVITY BASED COSTING

    INTRODUCTION:

    In the field of accounting, activity based costing and functional based costing are two methods or
    two systems for allocating indirect costs (overhead) to products. Activity based costing and
    Funtional based costing systems first estimate overhead costs related to the production and then
    assign these costs to products based on cost drivers rate.The difference between the activity
    based costing and functional based costing are in the accuracy and complexity .

    FUNCTIONAL BASED COSTING SYSTEM

    Functional based costing is also known as Traditional costing system or Absorption costing
    system , and it is used for production costs under GAAP (Generally Accepted Accounting
    Principles)

    Functional based costing system focuses on the functions of the groups and companies allocation
    system by different departments such as, administration department, marketing department and
    sales department.

    Functional based costing system is less acurate and more simplistic than the activity based
    costing and usually assigns overhead costs to products based on an arbitary middling rate.

    FUNCTIONAL BASED COSTING STEPS:

    There are several steps in functional based costing system:

     Firstly, identify indirect costs.


     Secondly, approximate indirect costs for the appropriate peroid (year, month or
    quarter)
     Thirdly, choose a cost driver with a fundamental link to the cost (machine hours or
    labour hours)
     Then, estimate an amount for the cost driver for the appropriate period (labour hours
    per quarter, etc)
     In last, compute the predetermined overhead rate.
    ADVANTAGES OF FUNCTIONAL BASED COSTING SYSTEM:

     Traditional costing is relatively easy to apply. It's easy for managers to trace all direct
    costs associated with a product, including labor and direct material costs.
     For a business that manufactures a large volume of a few products, traditional costing
    could provide a good idea of the costs of manufacturing a product.
     It recognizes the importance of fixed costs in production.

    DISADVANTAGES OF FUNCTIONAL BASED COSTING SYSTEM:

     As soaking up bing emphasized on entire cost viz. both variable and fixed, it is non so
    utilize for direction to utilize to do determination, planning and control.
     As the director‘s accent is on entire cost, the cost volume net income relationship is
    ignored. The director needs to utilize his intuition to do the determination.
     The manufacturing environment has changed in the decades since traditional costing
    methods were developed so FBC is kind of outdated now.

    ACTIVITY BASED COSTING SYSTEM

    Activity based costing is more accurate than functional based costing and more complex than
    functional based costing.

    Activity based costing focuses on the activities and process of business such as, receiving and
    purchasing.

    Activity based costing is a tool for manegerial decision making and it is an other costing system
    that can be implemented in addition to the functional based costing system.
    ACTIVITY BASED COSTING STEPS:

    There are several steps in activity based costing systems:

     Firstly, identify all of the activities in the value chain which are related to the
    production of the products.
     Secondly, estimate a total cost for each of the activities which are identified.
     Then, compute a cost driver rate for each activity based on a cost allocation base that
    has a underlying link to the cost of the activity.
     In last, apply activity costs to products using the appropriate cost – cost driver rate.

    ADVANTAGES OF ACTIVITY BASED COSTING SYSTEM:

     More accurate costing of products/services, clients, SKUs, distribution channels.


     Better understanding operating expense.
     Easier toA understandA for everyone.
     Utilizes unit cost instead than merely entire cost.
     Integrates good with Six Sigma and other uninterrupted betterment plans.
     Makes visible waste and non-value added activities.
     Supports public presentation direction and scorecards
     Enables bing of procedures, supply ironss, and value watercourses
     Activity Based Costing mirrors way work is done.
     Facilitates benchmarking.

    DISADVANTAGES OF ACTIVITY BASED COSTING SYSTEM :

     It is not useful for small companies.


     It is not be used to prepare monthly profit statement.
     If overhead costs are small so, there is no need of activity based costing.
     Some companies produce one product or few products and if so, then activity based
    costing can not be applied there.

    MAIN DIFFERENCES BETWEEN ABC AND FBC

    1. FOCUS

     Focus of ABC is organization.


     While focus of FBC is individuals.
    2. BASIC ASSUMPTION

     In ABC it is interdependence
     In FBC it is interdependence as well.

    3. CONTROL EMPHASIS

     In ABC it is activities.
     While in FBC it is costs.

    4. OBJECTIVE

     In ABC it is analysis.
     While in FBC it is cost control.

    5. CONTROL POINTS

     In ABC is process .
     While in FBC is outcomes.

    6. VARIANCE USAGE

     In ABC it is to improve process.


     While inFBC it is to balance ledger.

    7. STANDARDS

     In ABC it is historical or trended.


     While in FBC it is engineered or static.

    8. GOAL ENCOURAGED

     In ABC it is continuous improvement.


     While in FBC it is to meet standard.

    9. CONTROL CHARACTERISTICS

     In ABC it is multi-dimentional, ambiguous, stategic and operational.


     While in FBC it is one-dimentional, one-to-one map, budged based and financial.
    REFERENCES

     https://www.slideshare.net/ATBHATTI/activity-based-costing-system-
    15438620?next_slideshow=1
     https://bizfluent.com/info-12068830-functionalbased-vs-activitybased-cost-
    accounting-systems.html

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