Question

Assigned (800 words) to write by my own word about Activity-based accounting (ABC): its concept, how to implement it, its advantages and disadvantages.( no Plagiarism)

Answer 1

A) Concept of Activity- based accounting (ABC):-

Activity- based costing is an accounting method used to find the total cost of activities necessary to make a product. Inputs are transformed into output under the parameters set by controls performed by the organisation's employees and their tool.

B) Implementation of Activity- based accounting (ABC):-​​​​​​

​​​​ there are six steps to implement it.

1. Activity identification:-

activities must be identified and group together in activity pools.

2. Activity analysis:-

After identification the activities ABC continues with activity analysis clearly identifying the the processes which support a product.

3. Assignment of cost:-

Based on identifying the activities and analysing the activities cost are assigned to an activity pool.

4. Calculate activity rates:-

After assigning the all cost to an activity pool calculate the activity rate.

5. Assign cost to cost objects:-

Once activity cost pools and rates are identified and clearly defined, the next step to assign them to cost object.

6. prepare and distribute management reports:-

Once activity-based costing analysis is complete, prepare the reports and distribute it.

​​​​​C) Advantages of activity-based accounting:- ​​1.It helps in understanding the behaviour of overhead cost.

2.It links profitability analysis and operational decisions.

3.Itimproves the competitive position of a business.

4.It helps to identify unnecessary cost.

5. It helps to identify inefficient product, department and activities.

6.It provides information for measurement of performance.

7. it helps the management to fixing price of product and services.

8.It helps to control cost for each product and for each department.

D) Disadvantages of activity based costing (ABC):-

1. Collection and preparation of data is time consuming.

2.Source data isn't always readily available from normal accounting reports.

3. Cost more accumulated for analysing and identification of activities.

4.It is impossible to allocate all overhead costs to specific activities.