Question

In: Accounting

How would you use activity-based costing (ABC) in the organization you work/worked at? Explain activity level...

How would you use activity-based costing (ABC) in the organization you work/worked at? Explain activity level in your organization in addition to the steps needed to follow while implementing ABC.

Subject: Managerial Accounting

Write more than 350 words

Solutions

Expert Solution

For example, if the organization I'm working with is a Manufacturing Company. It has several departments and several activities. In the organisation, there are purchase department, receiving department, material handling department, sales department etc.

Activity level in the organisation can be,

1. Inspection activity

2. Setup activity

3. Maintenance activity

4. Material handling activity etc.

In this situation, it would be useful to implement Activity Based Costing.

For that, we need to identify the cost drivers of the activities identified.

Cost drivers for the above activities are as follows:

1. Inspection - Number of inspections

2. Setup - Number of machine setups required

3. Maintenance - Number of Machine hours

4. Material handling - Number of material requisitions

Once the cost drivers for the activities are identified, it's our duty to find the cost drivers quantity.

Entire activity cost would be divided by the total cost drivers quantity to know the activity rate per cost driver quantity.

Now, we can allocate the activity costs to various departments based on their respective cost driver quantity used in that department.

In this way, we can get accuarte cost details and it would help further in decision making not misleading the managers in the cost information of the products manufactured.

Hope this is helpful!!


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