Question

Write an annotated bibliography paper on Activity Based Costing

in 250 words

Answer 1

Activity-Based Costing:

Activity-based costing is a methodology that helps in assigning a cost to activities instead of products or services. Activity-based costing enables overhead & resources costs to be more accurately assigned to products & services that consume them.

Activity-based costing assigns a cost to activities on their use of resources.

Following terms has been used in Activity-based costing (ABC)  :

• Activity: Activity refers to an event that incurs costs related to any activities.
• Cost Object: Cost object is an item for which cost measurement is required.
• Cost driver: Two types of cost drivers are used which are Resource cost driver & activity cost driver.
• The cost pool represents a group of various individual cost items.

Under activity-based costing, the cost is attributed to the product on the basis of activity

Stages in Activity-based costing:

• identifying the different activities within an entity.
• Relate the cost or overheads to the related activities
• support activities are then spread across the primary activities
• determine the cost drivers &
• calculation of activity cost drivers rate for each activity.

Activity cost drivers rate can be calculated as follows:

Activity cost drivers = Total cost of activity / Activity driver.

Advantage of Activity Costing:

• it is a more accurate costing of products or services.
• Overhead allocation is done logically.
• Activity-based costing use unit cost rather than total cost.

The disadvantage of Activity Costing:

• Activity-based costing is expensive for an entity.
• Activity-based costing is useful for large entities only.
• Sometimes, the selection of cost drivers may not be too much use for that activity.