Activity Based Costing 12

Activity Based Costing 12

Activity–Based Costing



Activity–Based Costing

Activity based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity. Activity based costing is a subset of activity–based management. Activity based costing is used to determine product costs and for internal decision–making and for managing activities. Traditional Absorption costing is for external financial reporting.

Activity–based costing is a suitable and appropriate method for companies with multiple products or services who are having problem of inaccurate costing information and need to know which products are really profitable and which are the one that is making loss. For ... Show more content on Helpwriting.net ...Secondly, these activities are traced to the products, services, or customers for whom the activity is performed.

In conclusion, ABC stands out by breaking down the costs into a very detailed level. This information will give management a very clear picture of which processes come with high costs but little value and how to improve the process or to eliminate the process entirely. This method is suitable for use when there is high overhead, complex product and in very competitive market.

Difference between Activity–Based Costing and Traditional Absorption approach

Activity based costing systems accumulate costs into activity cost pools. These are designed to match to the major activities or business processes. The costs in each cost pools are largely caused by a single factor called the cost driver. Whereas in traditional costing, systems accumulate costs into facility–wide or department cost pools. The costs in each cost pool are different. There are many costs of different processes, which are not caused by a single factor.

Activity based costing systems allocate costs to products, services, and other cost objects from the activity cost pools using allocation bases corresponding to cost drivers of activities cost. Whereas in traditional costing, systems allocate to products using volume–based allocation bases, for example, units, direct labor, machine hours or revenue dollars.

In terms of hierarchy of costs, activity based costing allows for

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