Question

Think of the number of packaging varieties and sizes of a product such as Coca-Cola. Each contains the product the customer wants, a satisfying and delicious sweet drink. How can activity-based costing help the Coca-Cola company determine how much to charge for each variety? Your response should indicate the activities you imagine the company must pay for in order to produce the various containers of Coke.

Answer 1

Activity Based Costing (ABC)

Activity based costing (Here in after known as ABC) is the novel costing concept in the modern business. In ABC, it allocates overhead into multiple activity cost pools and assigns the activity cost pools to product or services by means of cost drivers.

In ABC the term Activity means any event, action, transaction, or work sequence that incurs cost when producing a product or providing a service

The necessity of ABC is arising due to:

v Tremendous change in manufacturing and service industries

v Significance increase in total overhead costs

v Complex manufacturing process may require multiple allocation bases

v Decrease in amount of direct labor usage

v Inappropriate to use plant-wide predetermined overheads rates when a lack of correlation exits.

ABC Allocates overheads costs in two stages:

1) Overhead costs are allocated to activity cost pools

2) The overhead costs allocated to the cost pools is assigned to product using cost drivers.

Activity based costing involves the following four steps.

When to use ABC