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Hi,
Is it correct that an activity based costing (ABC) system is not allowed under either current IFRS or US GAAP?
If so, why would a company consider changing from for example standard absorption costing to ABC, if it means that they would have to produce figures based on absorption costing as well as ABC in order to be compliant with income tax and other reporting regulations?
I understand that ABC can be very useful in some aspects, but that it is also time consuming and perhaps also confusing if those figures for management accounting purposes would have to be produced alongside those for financial accounting purposes.
I hope this makes sense and if someone would be happy to explain the motives behind the reasoning for this, that would be really appreciated!
Many thanks in advance!
Hi Ajlil! Welcome to Open Tuition!
You are absolutely correct & actually I am delighted to see you challenging the theory so early on in your learning journey
You are absolutely correct (for UK at least) ABC costing is not permissible for statutory accounting – so definitely any marks in discursive type questions are earned by realising this.
EG – yes internally it is worthwhile to doo ABC analysis for decision making to assign overhead costs to products based on those which use the cost causing activities…But when deciding is ‘ABC” is ‘useful’ as an alternative costing method then definitely its a big consideration that it takes lots of time/ lots of estimates/ and even after all that effort its not suitable for statutory accounts.
Hope that explains
Many Thanks
Cath
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