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In: Accounting

Explain the purpose of Activity-Based Costing(ABC).

Explain the purpose of Activity-Based Costing(ABC).

Solutions

Expert Solution

Answer: It is a method of costing which identifies activities and assigns indirect cost products.
It describes the necessary steps to determine the indirect costs associated with ABC and the
calculations necessary to allocate these costs to activities and products.
Finally it discusses the advantages and disadvantages of ABC and how
it can be used as a decision tool for management.

It goes on to show how direct costs and indirect costs are fit together to form a total cost for each division, product or client in an organization.

And on the other hand, ABC has two purposes, first to prevent cost distortion which happens in traditional accounting methods because all indirect costs are placed in a single cost
pool, usually based on the direct labor of each activity. This cost distortion is prevented in ABC
by developing numerous cost pools.
The other purpose is diminishing wasteful actions by providing several cost drivers.

ekkarill92 answered 1 year ago
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