Question

I NEED 2 PARAGRAPHS  

What is activity-based costing?

What is its goal?

What company circumstances especially encourage the use of activity-based costing?

Answer 1

It is one of the Managerial Accounting Method used for allocating the operating costs. Here Costs are distributed based on the activities or processes that are required for an Output. Here, operating and overhead costs are allocated to products or departments such as planning, manufacturing, administrative etc., (which generates costs) that are generated during the production process.

Here, Activity Cost Drivers i.e. an activity or process which cause the changes (increase or decrease) in the cost of production are considered and given more importance. It clearly defines the amount of cost incurred for an Individual factor or process. These individual cost drivers are pooled with similar processes into a cost pool which also relates to a single activity cost driver. These individual factors are analyzed to determine a Overhead Rate that will allocate these costs to Individual Jobs or Products.

It involves Multi and complex steps. But it is a accurate managerial accounting method for the allocation of the costs. Proper allocation of these costs is extremely important for Managerial Decisions. During the course of outsourcing or downsizing,managers review the allocation of these costs incurred and then will take decisions accordingly. Managers can understand which part of process is contributing to profits and which part is increasing the losses for creating a better budget for running the company smoothly.

It is a long range oriented programme that is used in a business. it is mostly followed in private businesses. Companies which can spend more time and invest resources by implementing a proper plan can use this method for obtaining the long term profits and colours.It requires experts from different areas of the company. It also involves huge costs for this process. A company which can spend more time in understanding its activities follow this Activity Based Costing.