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    The Strategic Role of Activity-Based Costing

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    Dabelistha
    Activity-based costing (ABC) is a method that assigns indirect costs to products based on their use of activities, rather than units produced. It provides more accurate product costs than traditional volume-based costing by tracing costs to specific activities and then assigning them to products based on each product's use of those activities. ABC involves identifying resources, activities, and cost drivers; assigning resource costs to activities; and then assigning activity costs to cost objects like products or customers. It provides benefits like better profitability measures, decision making, process improvement, and planning.

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    The Strategic Role of Activity-Based Costing

    Uploaded by

    Dabelistha
    41 views2 pages
    Activity-based costing (ABC) is a method that assigns indirect costs to products based on their use of activities, rather than units produced. It provides more accurate product costs than traditional volume-based costing by tracing costs to specific activities and then assigning them to products based on each product's use of those activities. ABC involves identifying resources, activities, and cost drivers; assigning resource costs to activities; and then assigning activity costs to cost objects like products or customers. It provides benefits like better profitability measures, decision making, process improvement, and planning.

    Original Description:

    Cost Management

    Original Title

    Ch 5

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    Activity-based costing (ABC) is a method that assigns indirect costs to products based on their use of activities, rather than units produced. It provides more accurate product costs than traditional volume-based costing by tracing costs to specific activities and then assigning them to products based on each product's use of those activities. ABC involves identifying resources, activities, and cost drivers; assigning resource costs to activities; and then assigning activity costs to cost objects like products or customers. It provides benefits like better profitability measures, decision making, process improvement, and planning.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    41 views2 pages

    The Strategic Role of Activity-Based Costing

    Uploaded by

    Dabelistha
    Activity-based costing (ABC) is a method that assigns indirect costs to products based on their use of activities, rather than units produced. It provides more accurate product costs than traditional volume-based costing by tracing costs to specific activities and then assigning them to products based on each product's use of those activities. ABC involves identifying resources, activities, and cost drivers; assigning resource costs to activities; and then assigning activity costs to cost objects like products or customers. It provides benefits like better profitability measures, decision making, process improvement, and planning.

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    The Strategic Role of Activity-Based Costing

    Activity-based costing (ABC) is a method for improving the accuracy of cost


    determination. It has been adopted by companies in varying industries and within government and
    non-for-profit organizations. The usage of these activities is not proportional to the number of units
    produced, then some managers will be overcharged and others undercharged under the volume-
    based approach. Another consideration is that the volume-based method provides little incentive
    for the manager to control indirect costs. The approach that charges indirect costs to product based
    on units produced does not provide very accurate product costs and certainly does not provide the
    appropriate incentives for managing the indirect costs. The solution is to use activity-based costing
    to charge these indirect costs to the products, using detailed information on the activities that make
    up the indirect costs
    Role of Volume Based-Costing
    Volume-based costing can be a good strategic choice for some firms when common costs
    are relatively small or when activities supporting the production of the product or service are
    relatively homogenous across different product lines. A professional service firm may not need
    ABC because labor costs for the professional staff are the largest cost of the firm, and labor is also
    easily traced to clients.
    Resources Activities, Resource Consumption Cost Drivers, and Activity Consumption Cost
    Drivers
    An activity is a specific task or action of work done. An activity can be a single action or
    an aggregation of several actions. A resource is an economic element needed or consumed in
    performing activities. For example are labor and supplies needed or used in manufacturing
    activities. A cost driver is a factor that causes or relates to a change in the cost of an activity. A
    resource consumption cost driver is some measure of the demand for resources by an activity. It is
    the basis for assigning resource costs to a particular activity or cost pool. An activity consumption
    cost driver measures the amount of an activity performed for a cost object. It is used to assign
    activity cost pool costs to cost objects.
    What is Activity-Based Costing?
    Activity-based costing (ABC) is a costing approach that assigns resource costs to cost
    objects such as products, services, or customers based on activities performed for the cost
    objects. ABC recognizes the causal or direct relationships between resource costs, cost drivers,
    activities, and cost objects in assigning costs to activities and then to cost objects.
    The Two-Stage Cost Assignment Procedure
    A two-stage cost assignment procedure assigns resource costs such as factory overhead
    costs to activity cost pools and then to cost objects to determine the amount of resource costs for
    each of the cost objects.
    In the first stage of volume-based costing the factory overhead costs are combined into a
    single plant cost pool or several departmental cost pools. In the second stage, a volume-based
    rate (based on units produced or hours used in production) is then used to apply overhead to each
    of the cost objects.
    Steps in Developing an Activity-Based Costing System
    Developing an activity-based costing system entails three steps:
    1. Identifying resource costs and activities,
    2. Assigning resource costs to activities,
    3. Assigning activity costs to cost objects.
    Benefits of Activity-Based Costing
    1. Better profitability measures
    ABC provides more accurate and informative product costs, leading to more accurate
    product and customer profitability measurements.
    2. Better decision making
    ABC provides more accurate measurements of activity-driving costs
    3. Process improvement
    The ABC system provides the information to identify areas where process improvement
    is needed.
    4. Improved planning
    Improved product costs lead to better estimates of costs for budgeting and planning.
    5. Cost of unused capacity

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