Activity-Based Costing ( ABC ) Essay

Activity-Based Costing ( ABC ) Essay

Activity Based Costing ACTIVITY BASED COSTING AND MANAGEMENT : AN OVERVIEW



Activity Based Costing (ABC) is more relevant than traditional costing in companies, where product mix is diverse in; batch sizes, physical sizes, degree or complexity, and raw material characteristics. ABC will also provide more decision useful information for the service industry, characterized by diversity in range of services provided. If the products in a plant or services provided posses similar characteristics, wither volume based or an activity based cost driver will provide reasonably accurate costs. The strategic goal of ABC is to provide decision useful cost and profitability information for optimal pricing decisions, appropriate product mix, and ... Show more content on Helpwriting.net ...The level at which activities are analysed can vary widely from the very aggregate to the very detailed. The level of detail should be matched to the level of analysis required to improve the decision–making within the organisation. Even within a single organisation, the level of detail can very from one part of the analysis to another, excessive detail will bog down the project and not provide any material benefit to the analysis. Too little detail will obscure the meaningful results that could be achieved.

The usefulness of an ABC analysis can be further enhanced by including a value analysis of every activity.



When constructing an ABC model, activity costs can be either traced directly to a cost objects. Examples of enabling activities include " paying employees" and "supporting PC users". We can then generate reports for these activities in various formats that show both the direct resources as well as those supports activities that form part of the total cost. Reports generally list the activities from highest cost to lowest cost. Management can then evaluate these activity costs in terms of whether they are too high, too low, or in the expected range. This is again a focusing mechanism for management in evaluating it

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