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ABC Costing

ABC Costing

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Published by Sonal Sachdeva

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Published by: Sonal Sachdeva on Feb 06, 2012
Copyright:Attribution Non-commercial


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Activity Based Costing

 Activity based costing is an accounting methodology that assigns costs to activities rather than products or services  When employees understand the activities they perform, they can better know the costs based on such activities.  ABC allows to find out the value, need for each activity so that they can get rid of the useless activities.

action.ACTIVITY Any event. . or work sequence that causes a cost to be incurred in producing a product or providing a service. transaction.

and customers? .ABC systems addresses the following Questions: ‡ What activities are being performed by the organisational resources? ‡ How much does it cost to perform activities? ‡ Why does the oranisation need to perform those activities? ‡ How much of each activity is required for the organisation s products. services.

Conventional Costing ABC Costing Resources Economic Element Expenses Activities Cost Objects Work Performed Cost Objects Product or service .

Basics of A B C Cost of a product is the sum of the costs of all activities required to manufacture and deliver the product. Products do not consume costs directly Money is spent on activities Activities are consumed by product/services .

Assign activity costs to products by multiplying the use of the cost drivers consumption rate .ABC Steps 1. Identify activities and resources 2. Measure the costs of resources used to perform each activity 3. Determine cost drivers and resource consumption rates 4.

Organisational cost drivers 3. Activity costs drivers . Structural cost drivers 2. forces or event that determine the costs of activities. Type of Cost Drivers:1.COSTS DRIVERS:is a factor.

Illustration 4-3 .

are those activities which are performed each time 3.Classification of Activities for Manufacturing Organizations:Activities are classified into various categories of the production process. material handling. Batch level. Activities are classified into:- 1. power. Unit levelhour. 4. labour hour. Facility level-are those activities which are needed to sustain factory s general manufacturing process. etc. maintaining bill of material. a batch of product is produced. inspection. . Ex-machine setups. maintenance and plant depreciation.factory management.activities are those which support the production of diff. production scheduling. Ex. Product level. these are repetitive work i. machine 2. types of product.e. Ex-maintenance of machine.

Brings accuracy 2. Utility is not same for all concerns . Improves managerial decisions Disadvantage:1. Helps in reducing costs 3.Advantage of ABC costing: 1. Costly 2. Problem in selecting drivers 3.

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