University of the People **We aren't endorsed by this school
BUS 3304
Nov 4, 2023
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Activity-Based Costing (ABC) is an accounting technique that allocates expenses to certain company activities and subsequently to products in accordance with the resources required for each activity(Tamplin, 2023). Steps are: 1. Identify activities The aim is to comprehend all activities involved in producing the company's goods. Interviews and meetings with employees from throughout the entire organization are necessary for this. 2. Assign overhead expenses to the activities listed in step 1's first phase. Each activity's overhead expenses must be attributed to the activity in order to complete this phase. Not direct labor or material expenditures, but overhead expenses. 3. Determine the cost-causing factor for each action. A cost driver is an action that contributes to or "drives" an activity's related expenses. Information must be gathered and key employees in many departments of the company, including buying, manufacturing, quality control, and accounting, must be questioned in order to identify cost drivers. 4. Determine an overhead rate that has been specified for each task. The projected amount of cost driver activity (from step 3), divided by the estimated overhead expenses (from step 2), is used to determine this. 5. Distribute overhead expenses among goods. The specified overhead rate for each activity (decided in step 4) is multiplied by the degree of the cost driver activity employed by the product to assign overhead expenses to specific goods (Gordon, 2023). The advantage of ABC costing is that it results in more accurate product costing since it takes into account direct costs and each activity's pricing. Since you have all the information, you can increase efficiency and cut down on waste, which may also help in decision-making. improved knowledge of the procedure. While a disadvantage is that it takes a lot of time because it requires identifying all the activities and cost drivers for each good or service. Gordon, J. (2023, June 23). Activity based costing (accounting) - explained . The business professor. https://thebusinessprofessor.com/en_US/accounting- taxation-and-reporting-managerial-amp-financial-accounting-amp- reporting/activity-based-costing-abc-method-defined Tamplin, T. (2023, March 12). Activity-based costing (ABC) principles, history & steps . Finance strategists. https://www.financestrategists.com/accounting/cost- accounting/activity-based-costing/activity-based-costing-steps/#:~:text=The
%20steps%20involved%20in%20an,resulting%20information%20for %20decision%2Dmaking .
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