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    Activity-Based Costing (ABC)

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    ramniwas sharma
    Activity-based costing (ABC) is a method that assigns both direct and indirect expenses to products based on their use of activities and resources. This provides a more accurate cost than simply allocating overhead evenly. ABC recognizes that different products require different levels of activities like testing. It calculates a cost driver rate for each activity based on its overhead costs, and uses this to assign the appropriate amount of overhead costs to each product.

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    Activity-Based Costing (ABC)

    Uploaded by

    ramniwas sharma
    24 views2 pages
    Activity-based costing (ABC) is a method that assigns both direct and indirect expenses to products based on their use of activities and resources. This provides a more accurate cost than simply allocating overhead evenly. ABC recognizes that different products require different levels of activities like testing. It calculates a cost driver rate for each activity based on its overhead costs, and uses this to assign the appropriate amount of overhead costs to each product.

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    Activity-based costing (ABC) is a method that assigns both direct and indirect expenses to products based on their use of activities and resources. This provides a more accurate cost than simply allocating overhead evenly. ABC recognizes that different products require different levels of activities like testing. It calculates a cost driver rate for each activity based on its overhead costs, and uses this to assign the appropriate amount of overhead costs to each product.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    24 views2 pages

    Activity-Based Costing (ABC)

    Uploaded by

    ramniwas sharma
    Activity-based costing (ABC) is a method that assigns both direct and indirect expenses to products based on their use of activities and resources. This provides a more accurate cost than simply allocating overhead evenly. ABC recognizes that different products require different levels of activities like testing. It calculates a cost driver rate for each activity based on its overhead costs, and uses this to assign the appropriate amount of overhead costs to each product.

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    © All Rights Reserved
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    Activity-Based Costing (ABC)

    The activity-based costing (ABC) system is a method of accounting


    you can use to find the total cost of activities necessary to make a
    product. The ABC system assigns costs to each activity that goes
    into production, such as workers testing a product.

    Many businesses use the cost of goods sold (COGS) to determine


    how much it costs to create a product. But COGS focus on direct
    costs and does not include indirect expenses like overhead.

    Some businesses take their overhead expenses and allocate them


    evenly among all products. But because some products use more
    overhead expenses than others, the cost of making each product is
    inaccurate under this method.

    With activity-based costing, you take into consideration both the


    direct and overhead costs of creating each product. You recognize
    that different products require different indirect expenses. By
    assigning both direct and overhead expenses to each product, you
    can more accurately set prices. And, the activity-based costing
    process shows you which overhead costs you might be able to cut
    back on.

    For example, you make soap. Soap A requires more overhead, like
    testing, than Soap B. Using activity-based costing, you assign the
    right overhead costs to the appropriate products. That way, your
    overhead is higher for Soap A than B.

    ABC is used to get a better grasp on costs, allowing companies to


    form a more appropriate pricing strategy. 

    This costing system is used in target costing, product


    costing, product line profitability analysis, customer profitability
    analysis, and service pricing. Activity-based costing is used to get a
    better grasp on costs, allowing companies to form a more
    appropriate pricing strategy. 

    The formula for activity-based costing is the cost pool total divided
    by cost driver, which yields the cost driver rate. The cost driver rate
    is used in activity-based costing to calculate the amount of overhead
    and indirect costs related to a particular activity. 

    The ABC calculation is as follows:  

    1. Identify all the activities required to create the product. 


    2. Divide the activities into cost pools, which includes all the
    individual costs related to an activity—such as manufacturing.
    Calculate the total overhead of each cost pool.
    3. Assign each cost pool activity cost drivers, such as hours or
    units. 
    4. Calculate the cost driver rate by dividing the total overhead in
    each cost pool by the total cost drivers. 
    5. Divide the total overhead of each cost pool by the total cost
    drivers to get the cost driver rate. 
    6. Multiply the cost driver rate by the number of cost drivers. 

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