In: Accounting
Overveiw: Activity Based Costing System and how its used.
Explain how determining the overhead rate for each product activity will help with pricing of a product.
Activity-based costing (ABC costing) is a method used to arrive at a cost price for a product – the total of direct and indirect costs required for production by identifying and costing all associated business activities.
A brief example of how to conduct ABC costing:
Determing Overhead rate for each product activity will ease the process of analysis of cost of activity factor & helps in adding a markup on the cost.
Some activity might be less costly in general but due to human error, inefficiency, idle time, machine improvements etc such activity becomes more costly. By determing overhead rate for each product activity it crystallizes the weakness or exceptions, so that corrective & effective steps can be taken to reduce unnecessary increase in cost.Hence it helps in cost reduction ultimately helps in pricing of product.