University of the People **We aren't endorsed by this school
BUS 3304
Nov 4, 2023
Uploaded by BailiffIce11081 on coursehero.com
Activity-Based Costing (ABC) is an accounting technique that helps businesses understand the cost and profitability of specific activities. Here are the five main steps used to implement ABC: 1. Identify Activities: The first step is identifying and defining all the activities involved in the production process. These can range from purchasing raw materials to the final assembly of the product (Kaplan & Anderson, 2007). 2. Assign Costs to Activities: Once activities are identified, costs are assigned to each activity. This is based on the resources each activity consumes. 3. Determine Cost Drivers: Cost drivers are the basis or cause of the activity's cost. For example, the number of machine hours might be a cost driver for a machine-based activity. 4. Assign Activity Costs to Products: After determining the cost drivers, the next step is to allocate the costs of activities to the products or services based on the extent to which each product uses the activity. 5. Compute and Analyze: Once all costs are allocated, ABC can provide detailed cost information, which can then be used for pricing, budgeting, and other management decisions. Advantages of using ABC: - Detailed Insight: ABC provides a more precise view of the costs associated with individual products and services (Kaplan & Anderson, 2007). - Better Decision Making: With more accurate cost information, businesses can make informed decisions about product pricing, discontinuation, and process improvement. - Highlight Inefficiencies: ABC can point out activities that are not adding value, helping businesses optimize their operations. Disadvantages: - Time-Consuming: Setting up and maintaining an ABC system can be labor- intensive (Drury, 2007). - Not Suitable for All Businesses: Some businesses, especially those with limited products or processes, may not benefit much from ABC. - Potential Misinterpretation: Without proper understanding, the detailed cost data from ABC can be misinterpreted, leading to incorrect decisions.
From my research I can deduce that the utilization of ABC has greatly enhanced the understanding of costs and the decision-making process. Although it has its drawbacks, its benefits are palpable in the right settings. REFERENCES Drury, C. (2007). Management and cost accounting. London: Cengage Learning. Retrieved from 18_Drury_MgtCostAcc10e-wm.pdf?sequence=1&isAllowed=y Kaplan, R. S., & Anderson, S. R. (2007). Time-driven activity-based costing. Harvard Business Review, 85(11), 131-138. Retrieved from the Harvard Business Review database. https://hbr.org/2004/11/time-driven-activity- based-costing
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