ABSTRACT
This chapter examines the use of activity-based costing, an approach which seeks to establish a more reliable and representative basis for tracking and controlling costs. It emerged in the 1980s as a way of addressing the problems caused by distorted or unreliable costing information; activity-based costing has attracted a good deal of attention and has gained many supporters and adherents. In the 1980s two American academics, Robert Kaplan and Robin Cooper, queried this relationship. They felt that basing the treatment of overheads, which are primarily fixed, on labour or machine hours provided convenient arithmetic but took too little account of how the costs included were incurred. The key to the ABC approach is to identify the cost drivers of the activities of a business in other words, the activity-related factors that generate the business costs. It not only helps financial managers calculate their costs more accurately but provides them with a useful tool for managing and controlling overheads.
