Question

Give example of company using ABC costing and explain the process used in this company to assign costs in an ABC system? (ABC costing)

Answer 1

Answer :-

Activity-based-costing

Activity-based costing refers to the allocation of cost,according to the actual consumption or an account of some basis for allocation by using cost drivers,using the cost hierarchy system, costs are assaigned to the activities on the basis of their tracebility to the product, many business especially, in the manufacturing industry, use activity based costing to help them to fixing the price of product and also helps to find out problems related to perticular activity  and rectify it.

The benifits that Activity-based costing provides to management are :-

• Activity based costing system use only one or two cost pools for the allocation of the costs
• Most of the indirect costs are distributed with respect to output unit level
• Diversity in the demand for resources created by th product due to diffrences in resource volumes,the complexity of process steps
• Products suitable for the business to create and sell in the market show less profit while the products unsuitable for the business to create and sell in the market show high profit.

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Example of Activity-based-costing

Let’s figure out how much you are spending on utilities to create a product. To do this, you estimate that your total utility bill is $20,000 for the year.

You determine that the cost driver impacting your utility bill is the number of direct labor hours worked. The number of direct labor hours worked totaled 1,000 hours for the year.

Divide your total utility bill by your cost driver (the number of hours worked) to get your cost driver rate. Your overhead application rate is $20 ($20,000 / 1,000 hours).

For this particular product, you used utilities for 3 hours. Multiply the hours by the cost driver rate of $20 to get $60.