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 these companies the effort required to successfully implement activity based costing is worth the time and resources. Activity based costing can identify high overhead costs per unit and find ways to reduce the costs, avoid decreases in head counts due to inaccurate allocation of costs, and measure profitability with higher accuracy than traditional costing that uses direct-labor hours as the only cost driver.
The way it works is first major activities are identified in the process system. Next cost pools are created for groups of activities that can be allocated together. Following this cost drivers is identified. The numbers of cost drivers used vary depending on the balance between accuracy and complexity. After determining the cost drivers, rates are calculated. The rates are then applied to the respective cost drivers for each product or service that is being considered. Dividing the total cost for the product by the total product units then derives the overhead cost per unit.
Overall, activity based costing has more advantages compare to traditional costing, but this method is only suitable for big company. As this method is costly and need substantial resources. By using activity based costing, it is easier to maintain low
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 these companies the effort required to successfully implement activity based costing is worth the time and resources. Activity based costing can identify high overhead costs per unit and find ways to reduce the costs, avoid decreases in head counts due to inaccurate allocation of costs, and measure profitability with higher accuracy than traditional costing that uses direct-labor hours as the only cost driver.
The way it works is first major activities are identified in the process system. Next cost pools are created for groups of activities that can be allocated together. Following this cost drivers is identified. The numbers of cost drivers used vary depending on the balance between accuracy and complexity. After determining the cost drivers, rates are calculated. The rates are then applied to the respective cost drivers for each product or service that is being considered. Dividing the total cost for the product by the total product units then derives the overhead cost per unit.
Overall, activity based costing has more advantages compare to traditional costing, but this method is only suitable for big company. As this method is costly and need substantial resources. By using activity based costing, it is easier to maintain low
References: * Kaplan, Robert S. and Bruns, W. Accounting and Management: A Field Study Perspective (Harvard Business School Press, 1987) http://www.gale.cengage.com/pdf/samples/sp665568.pdf * Encyclopedia of Management 6th Ed. 1,066 pp. 2009.