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