Question

Respond to the following in a minimum of 175 words: What is activity-based costing? What are some of the key elements of activity-based costing? How does this method differ from a more traditional costing method?

Answer 1

Activity based costing is a costing method that identifies the various activities and then identifies the cost on the basis of consumption of activities.

Follow are the key elements of ABC:-

1. Cost identification:-

In the first step we identify the costs which we need to allocate.

2. Loading secondary cost pools with respect to overheads that are not directly related with production of goods and services.

3. Loading primary cost pools with respect to overheads that are directly related to production of goods and services.

4. Activity drivers are measured which are used in allocation of secondary costs to primary cost pools.

5. Allocation of secondary cost pools to primary cost pools on the basis of drivers .

6. Primary cost pools is assigned to cost objects on the basis of activity driver.

7. Reports are formulated for management.

8. Management act on the basis of report and always want to reduce the number of activity drivers to reduce the overheads.

Difference between traditional costing and ABC:-

Traditional costing is more generic and generally used only one rate either labor rates or machine hour rate is used to allocate all the overheads. ABC is more scientific approach in allocation of overheads because it considers the actual consumption of drivers in allocation of overheads.