Borg Corporation uses a traditional costing system. Management is considering switching to an activity-based costing system....

Borg Corporation uses a traditional costing system. Management is considering switching to an activity-based costing system. What steps must Borg take in initiating an activity-based costing system?

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Answer: The following steps may be taken to initiate Activity Based Costing:

* First step is to identify costs that are driven by various factors along with amount of cost. For example, among all the overhead cost available, machine setup cost is driven by number of setups. All such costs that can be identified as a unique activity is identified.

* Second step is to devote the suitable cost driver to that activity cost pool of overhead cost.

* Next step is to calculate the Activity rate per Cost driver. For example, Machine setup cost identified in Step 1 is $400000, and total number of machine setups are 4000, then Activity rate will be $100 per machine setup for this activity cost.

* Fourth step is to allocate and find appropiate number of related cost drivers to each product/item.

* Fifith step include allocation of those activity cost identified in Step 1 to different products, using the activity rates calculated in 3rd Step and no. of cost drivers in Step four.

* Total cost allocated to each product or item for further decision making.

ekkarill92 answered 1 year ago

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