1.0 Activity-based costing(ABC) was developed/designed during the 1980s to avoid the shortcoming of absorption costing and marginal costing.

1.1 Shortcoming of Absorption costing –produce misleading product costs

1.2 Shortcoming of Marginal costing-does not attempt to connect general overhead costs to products. Also produce misleading product costs

2.0 CIMA defines ABC as:

· An approach to the costing and monitoring of activities which involves tracing resources consumption and costing final outputs. Resources are assigned to activities and activities to cost objects based on consumption estimates. The latter use cost drivers to attach activity costs to outputs.

3.0 ABC is called a “ one-step cost attribution system” as costs are not apportioned between activities- the costs of each activity are related directly to products. Cost attribution is “the process of relating cost to cost centres or cost units using cost allocation or cost apportionment”

4.0 ABC can help managers to control (a) product costs because it concentrates their attention on the volume of each cost driver consumed by each product and (b) overhead costs because ABC highlights the cost per unit of each cost driver.

5.0 ABC is very effective in modern manufacturing firms where they have high overhead costs and in the service industry. In service industry, the units of service are often the cost drivers themselves.

6.0 The steps/stages involve in ABC are as follows:

(a) Identify all the activities which support production

(b) Collect the costs of each activity into cost pools ( Cost pools are similar to cost centres in absorption costing except that cost pools do no contained any apportioned costs)

© Find out what it is that causes the cost of an activity to increase. This is called its cost driver

(d) Calculate the cost per unit of each driver by dividing the value of each cost pool by the volume of its cost driver

(e) Find out how much of each driver is used in making each product

(f) Lastly, multiply the quantity of each cost driver used by each product by the cost per unit of each driver which gives a figure for the overhead attributed to each product.

7.0 When ABC is used for planning and budgeting, it is called activity based budgeting or ABB

• Unpresented cheques- cheques issued to creditors, but not presented for payment to the firm’s bank, till the date of reconciliation
• Bank lodgements not yet credited-cheques received from debtors but not deposited in the bank account
• Credit transfer-money directly deposited in the bank by a debtor/customer
• Direct debit-instructions given to bank to pay an organization directly from the firm’s account
• Standing order-bank pays directly from the firm’s accounts, payment like insurance premium, rent, others
• Dishonored cheques-bank cannot accept the firm’s debtors’ cheques as the debtors/customers do not have sufficient funds to pay the firm.

Step 1: Check opening balances of both Cash Book and Bank Statement to ascertain whether the two balances are the same;

Step 2: Compare the Cash Book’s Dr column(receipts) with the Cr column of Bank Statement, tick all common items.

Step 3: Compare the Cash Book’s Cr columns(payments) with the Dr column of Bank Statement, tick all common item

Step 4: All items unticked in the Bank Statement will be adjusted in the Cash Book and all items unticked in the Cash Book will be recorded in the Bank Reconciliation Statement

Format 1 : When the Cash Book is on Debit Balance

Bank Reconciliation Statement

$

Debit balance as per Cash Book XXX

Add: Unpresented cheques xxx

Add: Direct receipts like dividends, interest and credit transfer xxx

Less: Direct debits like bank charges, standing order (xxx)

Less: Lodgements not yet credited by bank (xxx)

Balance as per Bank Statement XXX

Format 2 : When the Cash Book is on Overdraft/Credit Balance

Bank Reconciliation Statement

$

BANK OVERDRAFT balance as per Cash Book XXX

LESS: Unpresented cheques xxx

LESS: Direct receipts like dividends, interest and credit transfer xxx

ADD: Direct debits like bank charges, standing order (xxx)

ADD: Lodgements not yet credited by bank (xxx)

Balance as per Bank Statement XXX

Note that Format 1 and 2 is opposite when preparing the Bank Reconciliation