Activity Based Costing

Topics: Cost, Costs, Cost accounting Pages: 4 (1032 words) Published: August 16, 2013
Activity Based Costing

Activity-Based Costing (ABC) was developed as a practical solution for problems Associated with traditional cost management systems. In the early 1980’s many Companies began to realize that their traditional accounting systems were generating inaccurate costing information. Traditional cost accounting systems that were designed to address the issues of inventory valuation for external audiences have two deficiencies. The inability to accurately determine actual total product and service costs and the inability to provide useful information to management for purposes of making operating decisions.

Users of ABC
Businesses want to know which of their products and services make or lose money so they can remain competitive. To get a handle on this information, some companies have embraced activity-based costing/management (abc/m) to help them tract product and customer profitability and reduce operating costs. armed with the facts from, the abc/m data, managers can make better decisions about how they can use resources and can improve business processes. ABC Methodology

Activity-based costing is an accounting methodology that links the following elements; costs, which are the expenditures are classified as product costs. That resources are costs that are related to manufacturing the product, as well as period costs. This includes costs that are expended in the period they were incurred. Product costs are further classified as direct (traceable) and indirect (shared) costs, which are allocated to products using a selected basis such as labor hours. University costs can be classified as instruction cost that are directly or indirectly related to instruction and non-instruction costs, which are allocated on a selected basis such as number of students or number to student credit hours. Activities are defined as a unit of work performed within an organization or a work process, such as processing invoices or grading papers. Resources...
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