Question

Activity-based costing is one of the most accurate methods that can be used to allocate overhead. However, it is not often used in many smaller organizations due to the substantial cost involved with its implementation.

If you have utilized an activity-based costing system in your former or current employment, describe how this system had been used. In your response, be sure to include your experience and position on the effectiveness of the activity-based costing system. Support your ideas by drawing on your readings and scholarly articles.

If you have not encountered this type of system in your work experience, assume a company needs to switch to an ABC system. Describe the common cost drivers that could be used.

How would the organization identify the cost drivers?

How would the organization use them in the implementation of this system? You may use your former or current company for the analysis.

Answer 1

ACTIVITY BASED COSTING (ABC Analysis):

    ➤ It is the one of the methods of costing.

    ➤ It is used for allocating indirect costs/overheads of the products.

    ➤ It is used to estimate overheads based on production and assign cost to product based

         on cost driver rate.

COST DRIVERS:

  An activity cost driver is a factor that influences the expenses of certain business operations.

Cost drivers are very essential in ABC analysis. It is the root cause of why a cost occurs.

In ABC analysis, it drives the cost of labour, maintenance and other variable analysis.

The common cost drivers that can be used in ABC:

   ⧫The most common cost driver has historically been direct labor hours.   

   ⧫ Expenses incurred relating to the layout or structure of a building or warehouse may

      utilize a cost driver of square footage to allocate expenses.

   ⧫ More technical cost drivers include machine hours, the number of change orders,

      the number of customer contacts, the number of product returns, the machine

       setups required for production or the number of inspections.

Identification of cost drivers:

  Cost drivers are identified at the time where overhead costs are known & individual overheads were analysed and cost pool is computed.

Implementation of ACTIVITY BASED COSTING:

An organisation can opt to fully implement this system from the start.

By following this system, an organisation can ensure that it ends up with has been designed to meet it specific needs.

Numerous approaches can be taken while implementing this ABC analysis.

Thus, an organisation can implement this method of principle in allocating overheads and costs.