Traditional cost systems allocate costs based on direct labor, material cost, revenue or other simplistic methods.Īs a result, traditional systems tend to over-cost high volume products, services and customers and under-cost low volume.Īctivity based costing should not be treated as an alternative to job costing or process costing but as one of the best tools for refining a costing system which provides a better measurement of the non-uniformity in the use of an organization’s overhead resources for job, products and services.Īctivity-based costing incorporates in its costing system the basic and vital role of different activities. Explanation of Activity-Based CostingĪctivity based Costing (ABC) is a systematic, cause & effect method of assigning the cost of activities to products, services, customers or any cost object.ĪBC is based on the principle that “products consume activities”. Moreover, Activity-Based Costing (ABC) has been developed as a more modern absorption costing method to overcome the problems of under-costing and over-costing and to produce more accurate product costs. Activity-Based Costing (ABC) - DefinitionĪn activity-based costing system (also known as ABC System) is a two-stage procedure for assigning overhead costs to products, which focuses on the major activities performed in the production process.Īctivity-based costing is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each.
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