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Activity-based costing (ABC) is a type of accounting method. Firstly, all the activities performed by a firm is identified and then indirect costs is assigned to products. The relationship between activities, costs and products is recognized by an Activity-based costing system. The sectors or areas where this costing system is used are -product costing, target costing, product line profitability analysis, service pricing and customer profitability analysis. The objectives of Activity-based costing given in Activity Based Costing
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• Identification and Elimination of the products and services those are unprofitable.
• To lower the prices of the products and services those are overpriced.
• To identify production or service processes that are ineffective and to eliminate them.
The applications of ABC given in Activity Based Costing Assignment Help Online Service are:
• It helps for better management.
• Helps in calculating costs accurately.
• Helps to verify incompetent products, activities and departments.
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The Activity Based Costing Process Flow
The various steps involved in Activity based costing flow is explained in Activity Based Costing Assignment Help Online Service, they are:
- Identify Costs:
This is the most important step. In this step we identify those costs that we want to allocate. For example, if we want to calculate the full cost of some channel, then we have to identify advertising and warehousing costs related to that channel, and we will ignore research costs, since research costs are related to products.
- Load Secondary Cost Pools:
Secondary cost pools include services like administrative services, computer services, etc. In this step cost pools are created for those costs that are sustained to provide services to other parts of the company.
- Load Primary Cost Pools:
Here, a set of costs is created for those costs which are more closely aligned with the production of goods. Research and development, advertising, distribution are included in such costs.
- Measure Activity Drivers:
Here, a data collection system is used to collect information about the activity drivers. These activity drivers are used to allocate the costs in secondary cost pools to primary cost pools and also allocate costs in primary cost pools to cost objects.
- Charge costs to cost objects:
Activity driver is used for allocation of the contents of each primary cost pools to cost objects. Each cost pool has a separate activity driver. The total cost in each cost pool is divided by the total amount of activity in the activity driver in order to allocate the cost.
- To Create Reports:
Here, the results of the activity-based costing system is converted into reports. These reports are used management consumption.
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