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Activity Based Costing Is An Accounting Methodology
Activity Based Costing Is An Accounting Methodology
Activity Based Costing Is An Accounting Methodology
Activity based costing is an accounting methodology that assigns costs to activities rather than products or services When employees understand the activities they perform, they can better know the costs based on such activities. ABC allows to find out the value, need for each activity so that they can get rid of the useless activities.
Activity
Any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service.
Conventional Costing
Expenses
ABC Costing
Resources
Economic Element
Work Performed
Cost Objects
Product or service
Basics of A B C
Cost of a product is the sum of the costs of all activities required to manufacture and deliver the product. Products do not consume costs directly Money is spent on activities Activities are consumed by product/services
ABC Steps
1. Identify activities and resources 2. Measure the costs of resources used to perform each activity 3. Determine cost drivers and resource consumption rates 4. Assign activity costs to products by multiplying the use of the cost drivers consumption rate
COSTS DRIVERS:is a factor, forces or event that determine the costs of activities. Type of Cost Drivers:-
Illustration 4-3
Classification of Activities for Manufacturing Organizations:Activities are classified into various categories of the production process. Activities are classified into:-
2. Batch level- are those activities which are performed each time 3. 4.
a batch of product is produced. Ex-machine setups, inspection, production scheduling. Product level- activities are those which support the production of diff. types of product. Ex-maintenance of machine, maintaining bill of material, material handling, etc. Facility level-are those activities which are needed to sustain factorys general manufacturing process. Ex- factory management, maintenance and plant depreciation.
1. Brings accuracy 2. Helps in reducing costs 3. Improves managerial decisions Disadvantage:1. Costly 2. Problem in selecting drivers 3. Utility is not same for all concerns