Question

What do you understand by ABC costing? Explain the process used to assign costs in an ABC system

Answer 1

Activity-based costing is a costing procedure that distinguishes exercises in an association and doles out the expense of every activity with assets to all items and administrations as per the real utilization by each. This model doles out more roundabout expenses into direct costs contrasted with traditional costing

1. Distinguishing Activities:

The principal arrange is to distinguish the utilitarian territories or significant exercises engaged with the generation. Precedents of exercises incorporate machine related exercises, redirect work related exercises and different help exercises like requesting, getting, material taking care of, pressing, despatching. Different exercises are distinguished via doing activity examination.

2.Assigning Costs to Activity Cost Centers:

The second stage necessitates that a cost focus (additionally called a cost pool) be made for every activity. After the exercises have been distinguished the expense of assets devoured over a predefined period must be relegated to every activity. These expenses should be allotted on some reasonable premise. For instance the aggregate expenses of all set ups may establish one cost community for all setup related expenses.

3. Choosing Appropriate Cost Drivers:

The third phase of planning ABC framework is to distinguish the components that impact the expense of a specific activity. The term cost-driver is utilized to depict the huge determinant of the expense of the activity. The most reasonable cost driver in every activity under useful zones ought to be recognized. A cost driver is any factor that impacts costs.

4. Allocating the Cost of the Activities to Products:

The last stage is to follow the expense of the exercises to items as indicated by every item's interest for these exercises utilizing cost drivers as a proportion of interest. An item's interest for the exercises is estimated by the quantity of exchanges it produces for the cost driver. The cost driver ought to be quantifiable in a way that empowers it to be related to singular items.