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    Activity Based Costing

    Uploaded by

    Allysa Navarro
    Activity based costing (ABC) is an approach that assigns manufacturing overhead costs to products in a more accurate way than traditional costing methods. ABC first assigns overhead costs to the specific activities that cause those costs, like machine setups or engineering. It then only allocates the costs of each activity to the products that demanded that particular activity. This leads to more precise allocation of overhead costs than simple methods like allocating all overhead based on machine hours. ABC may involve a two-stage cost allocation process where overhead is first assigned to intermediate cost pools and then allocated from those pools to final products using multiple cost drivers. A key assumption of ABC is that overhead costs are caused by different activities that products utilize in varying amounts.

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    Activity Based Costing

    Uploaded by

    Allysa Navarro
    37 views2 pages
    Activity based costing (ABC) is an approach that assigns manufacturing overhead costs to products in a more accurate way than traditional costing methods. ABC first assigns overhead costs to the specific activities that cause those costs, like machine setups or engineering. It then only allocates the costs of each activity to the products that demanded that particular activity. This leads to more precise allocation of overhead costs than simple methods like allocating all overhead based on machine hours. ABC may involve a two-stage cost allocation process where overhead is first assigned to intermediate cost pools and then allocated from those pools to final products using multiple cost drivers. A key assumption of ABC is that overhead costs are caused by different activities that products utilize in varying amounts.

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    Managerial Accounting

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    Activity based costing (ABC) is an approach that assigns manufacturing overhead costs to products in a more accurate way than traditional costing methods. ABC first assigns overhead costs to the specific activities that cause those costs, like machine setups or engineering. It then only allocates the costs of each activity to the products that demanded that particular activity. This leads to more precise allocation of overhead costs than simple methods like allocating all overhead based on machine hours. ABC may involve a two-stage cost allocation process where overhead is first assigned to intermediate cost pools and then allocated from those pools to final products using multiple cost drivers. A key assumption of ABC is that overhead costs are caused by different activities that products utilize in varying amounts.

    Copyright:

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

    Activity Based Costing

    Uploaded by

    Allysa Navarro
    Activity based costing (ABC) is an approach that assigns manufacturing overhead costs to products in a more accurate way than traditional costing methods. ABC first assigns overhead costs to the specific activities that cause those costs, like machine setups or engineering. It then only allocates the costs of each activity to the products that demanded that particular activity. This leads to more precise allocation of overhead costs than simple methods like allocating all overhead based on machine hours. ABC may involve a two-stage cost allocation process where overhead is first assigned to intermediate cost pools and then allocated from those pools to final products using multiple cost drivers. A key assumption of ABC is that overhead costs are caused by different activities that products utilize in varying amounts.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Activity Based Costing

    Activity based costing (ABC) assigns manufacturing overhead costs to products in a


    more logical manner than the traditional approach of simply allocating costs on the
    basis of machine hours. Activity based costing first assigns costs to the activities
    that are the real cause of the overhead. It then assigns the cost of those activities
    only to the products that are actually demanding the activities. Activity based
    costing recognizes that the special engineering, special testing, machine setups,
    and others are activities that cause coststhey cause the company to consume
    resources. Under ABC, the company will calculate the cost of the resources used in
    each of these activities. Next, the cost of each of these activities will be assigned
    only to the products that demanded the activities.
    Activity-based costing (ABC) is a better, more accurate way of allocating
    overhead.
    Recall the steps to product costing:
    1.
    2.
    3.
    4.

    Identify the cost object;


    Identify the direct costs associated with the cost object;
    Identify overhead costs;
    Select the cost allocation base for assigning overhead costs to the cost
    object;
    5. Develop the overhead rate per unit for allocating overhead to the cost
    object.
    Activity-based costing refines steps #3 and #4 by dividing large heterogeneous cost
    pools into multiple smaller, homogeneous cost pools. ABC then attempts to select,
    as the cost allocation base for each overhead cost pool, a cost driver that best
    captures the cause and effect relationship between the cost object and the
    incurrence of overhead costs. Often, the best cost driver is a nonfinancial variable.
    ABC can become quite elaborate. For example, it is often beneficial to employ a
    two-stage allocation process whereby overhead costs are allocated to intermediate
    cost pools in the first stage, and then allocated from these intermediate cost pools
    to products in the second stage. Why is this intermediate step useful? Because it
    allows the introduction of multiple cost drivers for a single overhead cost item.
    This two-stage allocation process is illustrated in the example of the apparel factory
    below.
    ABC focuses on activities. A key assumption in activity-based costing is that
    overhead costs are caused by a variety of activities, and that different products
    utilize these activities in a non-homogeneous fashion. Usually, costing the activity is
    an intermediate step in the allocation of overhead costs to products, in order to
    obtain more accurate product cost information. Sometimes, however, the activity
    itself is the cost object of interest. For example, managers at Levi Strauss & Co.
    might want to know how much the company spends to acquire denim fabric, as

    input in a sourcing decision. The activity of acquiring fabric incurs costs


    associated with negotiating prices with suppliers, issuing purchase orders, receiving
    fabric, inspecting fabric, and processing payments and returns.

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