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Activity-Based Product Costing

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Activity-Based Product Costing

Activity-Based Costing (ABC) is a cost assignment approach that uses driver and direct tracing

to assign costs to activities and then uses drivers to assign costs to cost objects. In essence, ABC

involves two stages tracing cost to activities and tracing activity costs to cost objects (Mowen et

al., 2018). According to Mowen et al (2018), cost overheads under ABC included indirect labor

and costs such as electricity and depreciation. Activities include moving, setting up processes

and facilities, and engineering. The final objects are products, departments, and

suppliers/customers.

I think Dave and Save should use activity-based product costing for the following reasons. One,

ABC has the ability to enhance product-costing accuracy, which is lacking in their current

product-costing technique. Mowen et al. (2018) note that labor is not the only resource consumed

by activities. They consume other resources such as energy, material and capital. If one of these

resources is not factored in product costing, the final price will not reflect resource consumption.

Second, ABC can be used to show one what is causing certain costs. Whether a business is small

or big, every action and inaction comes at a cost. Time and the cost of setup are crucial

resources that can be overlooked and which should be factored in costing. The amount of time

spent on each activity is sometimes not shown in business ledgers or not reflected in the final

price. Through the application of direct and driver tracing, such costs can accurately be assigned.

Third, ABC is not suitable for companies or businesses that deal in one type of product or offer

one type of service. In this case, Dave and Sam deal with an array of hunting garments that is

make hunting comfortable and efficient, and therefore ABC can be applied. With a single service

or product, costs can be appropriately factored, and there is no need for ABC.
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Fourth, with manufacturing overhead increasing, ABC allows businesses to refine costing the

dollar and optimize production processes and activities. Fifth, Sam and Dave should implement

ABC because they do not exist in a custom environment where they make specific products for

specific clients. Sixth, the two should implement ABC because it will act as a catalyst to their

business processes and growth. ABC will standardize processes and practices. Besides, ABC

will give the two a better comprehension of costs drivers and overheads and such they will notice

non-value processes and activities (Mowen et al. 2018). Such activities can be eliminated

without interrupting the business. Mowen notes that assigning environmental costs to product

can birth valuable managerial information that would benefit Sam and Dave in managing cost

and the entire business.

Lastly, the two should implement ABC as it will help them avoid ignoring the cause-and-effect

relationship. Thus shift focus from a unit-based costing system that might be leading to products

not being allocated the correct overheads costs.

Conclusion

Sam and Dave should not worry about the size of their business regarding the implementation of

ABC for it is not that costly to put in place. They should implement the approach as it will help

them trace overhead costs that are overlooked or ignored in the costing process. By dealing in an

array of hunting garments and decoy, their business is suitable for the approach as different

products have different overhead costs tied to them.

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References

Mowen et al. (2018). Managerial Accounting 7e: The Cornerstone of Business Decision Making,

7th Edition