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In: Accounting

Research a company that uses activity based costing. Be specific about that company. Write a paragraph...

Research a company that uses activity based costing. Be specific about that company. Write a paragraph or two on why this company decided to use activity based costing. How has ABC changed the company's profitability ?

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Expert Solution

Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods. However, some indirect costs, such as management and office staff salaries, are difficult to assign to a product.
The ABC calculation is as follows:  

Identify all the activities required to create the product.

Divide the activities into cost pools, which includes all the individual costs related to an activity—such as manufacturing. Calculate the total overhead of each cost pool.

Assign each cost pool activity cost drivers, such as hours or units.

Calculate the cost driver rate by dividing the total overhead in each cost pool by the total cost drivers.

Divide the total overhead of each cost pool by the total cost drivers to get the cost driver rate.

Multiply the cost driver rate by the number of cost drivers

ekkarill92 answered 1 year ago
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