Activity Based Costing Case Study

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Briefly describe the five (5) steps used to implement activity-based costing (ABC). Activity-based costing is a system of costing where an organization uses numerous costs pool and various predetermined overhead rate which comes from activities to allocate overhead cost (Heisinger & Hoyle, 2012). That said, there are basically five steps used to implement the Activity-based costing (ABC). The first step is to identify costly activities required to complete products. In an attempt to accomplish this, the management of the organization should endeavor to interact with various personnel and get a firsthand knowledge of activities that make up the overhead cost of a product. After such interactions, an effective management would be able to select…show more content…
A cost driver is a factor that brings about a change in the cost of a product (Averkamp, n.d.). Again, in this scenario, the ideal way to identify cost driver is to have an honest conversation with key personnel of the organization and getting certain information from them to ascertain what is driving cost. Important personnel capable of supplying such information include purchasing manager, production manager, quality control manager, and most reliably, the accountant. Essentially, the personnel would be able to facilitate information that includes the estimate of activity for each cost…show more content…
After an emphatic consideration, we realized that Activity-based costing has numerous advantages over other costing systems. Some of the advantages are duly explained below. More accurate cost information leads to better decisions. While traditional methods of costing do not provide accurate cost information, Activity-based costing certainly provides detailed and accurate cost information that enable management of organizations to enact effective decisions with respect to the price charged on products, changes to product lines, and the quantity of manufactured product. Process improvements and costs reduction through the increased knowledge of production activity: Informed management would focus on improving efficiency on expensive activities that could eventually lead to a price reduction of a product. But this can be done as the management identify the activities involved in the production process and duly allocate costs to these activities. These are the knowledge provided by Activity-based costing. Fair allocation of overhead cost on products: Activity-based cost provides the necessary incentives of fairly allocating overhead cost to products with utmost accuracy. These are some of the advantages of Activity-based

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