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Activity Based Costing

Activity Based Costing

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Published by ClassOf1.com
"Looking for personalized help with your cost accounting assignments? Visit http://classof1.com/homework-help/management-accounting-homework-help/

Activity Based Costing:
This document explains about Activity based costing. It delves into the details of the aims of activity based costing, the methodology used, and finally the applications in routine business."
"Looking for personalized help with your cost accounting assignments? Visit http://classof1.com/homework-help/management-accounting-homework-help/

Activity Based Costing:
This document explains about Activity based costing. It delves into the details of the aims of activity based costing, the methodology used, and finally the applications in routine business."

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Published by: ClassOf1.com on Apr 16, 2014
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04/16/2014

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Management ccounting
 
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The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for submitting the same in lieu of their academic submissions for grades.
Subject: Management Accounting
 
ctivity Based Costing
 What is Activity Based Costing?
In cost accounting Activity Based Costing or ABC refers to a particular methodology
of identifying various actives within an enterprise and thereby assign each activity’s
cost in the entire production process, to find out the cost involved due to consumption by each of the activities. In this model the indirect overhead costs are transferred to the direct costs of the production units. As per the definition of ABC provided by CIMA, it has been treated as an approach towards monitoring and costing of activities that includes identifying consumption of resources and costing end products.
 Aims of Activity Based Costing
Using Activity Based Costing, business enterprises may effectively calculate the elements of cost for the production of commodities, which passes through various activities and services in various departments. The evaluations done through ABC help the management of the company in several ways, including:
 
 Aims related to product and service portfolio: Identification and elimination of products and services which are not at all profitable and reduce the prices of such products or services which are overpriced.
 
 Aim of re-engineering process: Identification of such processes of production and services that are ineffective, and their elimination so as to replace them  with other methods that give better yield.
 
 *
The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for submitting the same in lieu of their academic submissions for grades.
Subject: Management Accounting
 
Methodology
 Activity based costing methodology in operational management focuses of allocation of cost. Activity based costing allow segregation into overhead cost, fixed cost and  variable cost. Cost splitting helps in the identification of drivers of cost, if achieved.  While tracing of costs relating to a product can be relatively easier for direct material and direct labor, it becomes difficult to allocate the indirect costs to the product. Some type of weighting is required for the process of cost allocation in case of resources that are used commonly by products. The factors that drive or create the cost of any activity are called cost drivers. For example, in the case of running machinery (activity) the machine running hours (cost driver) give birth to expenses related to maintenance, labor and power (cost).
 Applications in routine business
 Activity based costing is not just a topic of discussion for the students of commerce  but it has its applicability in the real life business as well, which can be in accounting, costing as well as financing.
 
It is a modeling process which could be applicable partially or fully.
 
It helps in the identification of inefficient departments, activities and products.
 
It allows allocation of greater number of resources on profitable departments, products and activities.
 
It helps controlling per unit cost of products and also on the cost incurred in each department.
 
It identifies unnecessary costs which can be eradicated to eliminate them.

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