Activity-based costing (ABC) is a costing method that provides a more accurate way to allocate indirect costs to products or services by focusing on the activities that consume resources (Kenton, 2023). The implementation of activity-based costing (ABC) includes the following steps: 1. Identify Activities: Identify all the costly activities that occur to create the product (Kenton, 2023). 2. Assign Costs to Activities: Once activities are identified, the next step is to assign all direct and indirect costs associated with each activity (Kenton, 2023). 3. Identify Cost Drivers: Identify the relevant cost drivers which are the factors that cause the costs of activities to increase or decrease for each of the activities (Kenton, 2023). 4. Calculate Activity Rates : A predetermined overhead rate for each activity is to be calculated by dividing the total cost of each activity by the total quantity of its cost driver (Kenton, 2023). 5. Allocate Costs to Products: Lastly, the overhead cost is allocated by multiplying the activity rates derived in step 4 by the level of cost driver activity used by the product (Kenton, 2023). The advantages of using ABC are it leads to more accurate product costing by providing a more accurate representation of how each product or service consumes resources and incurs costs. Moreover, ABC allows businesses to identify areas where cost-reduction efforts can be most effective by identifying cost drivers that consume the most resources. As a result, it allows businesses to make better decisions and set a market-competitive price for their products and at the same time ensure that profit is lost. On the other hand, implementing ABC can be complex and time-consuming and can be costly for small businesses that have limited product lines and customer demands. Reference Kenton, W. (2023, March 07). Activity-Based Costing (ABC): Method and Advantages Defined with Example. Investopedia. Retrieved on 16 September 2023 from https://www.investopedia.com/terms/a/abc.asp
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