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CIMA Official Terminology describes activity-based costing as an approach to the costing and monitoring of activities, which involves tracing resource consumption and costing final outputs. Resources are assigned to activities and activities to cost objects. The latter use cost drivers to attach activity costs to outputs. ABC was first defined in the late 1980s by Kaplan and Bruns. It can be considered as the modern alternative to absorption costing, allowing managers to better understand product and customer net profitability. This provides the business with better information to make value-based and therefore more effective decisions. ABC focuses attention on cost drivers, the activities that cause costs to increase. Traditional absorption costing tends to focus on volume-related drivers, such as labour hours, while activity-based costing also uses transaction-based drivers, such as number of orders received. In this way, long-term variable overheads, traditionally considered fixed costs, can be traced to products. The activity-based costing process: What benefits does ABC provide?Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them. ABC enables effective challenge of operating costs to find better ways of allocating and eliminating overheads. It also enables improved product and customer profitability analysis. It supports performance management techniques such as continuous improvement and scorecards. Questions to consider when implementing ABC
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What is the formal method of analysis applied by management to identify appropriate cause drivers and effects on the cost of production?Activity-based costing (ABC)
How do you identify cost drivers in activityAssign each cost pool activity cost drivers, such as hours or units. Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers. Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate.
How do you identify cost drivers?How to Determine Cost Drivers. Locating Cost Drivers. Before you can determine the cost driver, you must first locate the cost objects. ... . Determine the Value of Activity Based Costing. ... . Choose Activity-based Categories. ... . Eliminating the Unnecessary Cost Drivers.. What is the formal method of analysis applied by management?a Cost analysis bo Crystal grazing Activity Analysis de.
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