What is Activity-Based Costing?
Activity-Based Costing (ABC) is a cost accounting system that assigns overhead costs to products or services based on the activities that drive them. It is used to identify and assign costs to activities that are the true drivers of costs. It is a more accurate way of allocating overhead costs than traditional methods like job order costing or process costing.
Benefits of Activity-Based Costing
Activity-based costing has several benefits:
- It helps identify the actual costs of activities and products, so that pricing can be more accurately determined.
- It helps identify the activities that are most expensive and drives cost-saving initiatives.
- It helps identify activities that are not necessary and can be eliminated.
- It helps allocate resources more efficiently.
- It helps identify opportunities to outsource activities that are not cost-effective.
Examples of Activity-Based Costing
Here are some examples of how Activity-Based Costing can be used:
- In manufacturing, overhead costs like materials, labor, and equipment are assigned to products based on the activities that drive them.
- In retail, overhead costs like rent, utilities, and advertising are assigned to products based on the activities that drive them.
- In service industries, overhead costs like rent, utilities, and employee salaries are assigned to services based on the activities that drive them.
Activity-based costing is an important cost accounting system that helps companies accurately assign costs to products and services. It is a powerful tool for identifying and reducing costs and improving efficiency.
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