Acct745 Week 2

Acct745 Week 2

Running Head: ACTIVITY–BASED COSTING



Activity–Based Costing

Adriana Vlasin

Davenport University

ACCT745

Larry L. Simpson CPA, CGMA

March 1, 2015



Abstract



This paper provides a brief presentation of Activity–Based Costing methodology, how is used as well as its short comings.



Activity–Based Costing



Activity–based costing (ABC) methodology is an instrument designed to provide accountants and managers with valuable costing information that will allow them to make sound strategic decisions. It is used as a secondary methodology rather than a replacement for the company's primarily costing system. The ABC methodology identifies activities in an organization and for each activity it assigns a cost. The cost reflects the actual resource consumption by each activity that has been identified.

Under a traditional system, overhead cost is allocated to an activity based on hours or rates for direct labor or machine usage. However, this approach does not clearly indicate how much overhead cost will be needed in order to complete a job through a particular function. ABC methodology is to be used as an alternative to traditional accounting where a business 's overhead costs (indirect costs such as electrical energy consumption for heating or cooling, or indirect cost associated with marketing) are allocated as a proportion of direct costs, to an activity. This approach is unsatisfactory because there can be cases where two activities could absorb the same direct costs

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