Esponel (es)
Türkçe (tr)
Russian (ru)
한국인 (kr)
Italiano (it)
हिंदी (in)
عربي (ar)
Français (fr)
Deutsch (de)
日本 (jp)
中国人 (cn)
CandleFocus Glossary Editor.png)
Activity-based costing (ABC) is an alternative method of cost accounting to the traditional system that assigns costs to products and services based on the volume of output produced. The ABC system assigns the costs using cost drivers, which are activities associated with costs in specific processes. These activities are more specific and detailed than the traditional accounting system, which typically assigns costs to products or services by using several volume-based cost drivers.
The ABC system is based on the premise that activities cause costs and therefore assigning costs to the activities will allow for a better understanding of the true cost of products and services. By allocating more accurate costs, decision makers can then more accurately compute costs and prices by taking into account the resources they consume when completing each activity.
To properly set up and run ABC, a company must develop an appropriate activity-based cost model. This involves breaking down the processes in a system or organization into a number of separate activities. Once the activities are identified, the activities need to be grouped together into cost pools, where the costs are assigned to each pool. After this, cost drivers are identified, which describe how the cost of the activity is apportioned between the different products or services.
The ABC system also enables companies to measure and improve the efficiency of their processes. By analysing the cost drivers, process bottlenecks can be identified and addressed, leading to increased efficiency. Furthermore, by carefully monitoring their cost drivers, managers can more accurately predict the cost of future activities, allowing for better cost planning and control.
In conclusion, Activity-based Costing (ABC) is an alternative method of cost accounting, which assigns costs to products and services based on activities associated with costs in specific processes. ABC allows for a more accurate understanding of the true cost of products and services, better cost planning and control, and improved process efficiency. These factors make ABC an attractive alternative to traditional cost accounting methods.
The ABC system is based on the premise that activities cause costs and therefore assigning costs to the activities will allow for a better understanding of the true cost of products and services. By allocating more accurate costs, decision makers can then more accurately compute costs and prices by taking into account the resources they consume when completing each activity.
To properly set up and run ABC, a company must develop an appropriate activity-based cost model. This involves breaking down the processes in a system or organization into a number of separate activities. Once the activities are identified, the activities need to be grouped together into cost pools, where the costs are assigned to each pool. After this, cost drivers are identified, which describe how the cost of the activity is apportioned between the different products or services.
The ABC system also enables companies to measure and improve the efficiency of their processes. By analysing the cost drivers, process bottlenecks can be identified and addressed, leading to increased efficiency. Furthermore, by carefully monitoring their cost drivers, managers can more accurately predict the cost of future activities, allowing for better cost planning and control.
In conclusion, Activity-based Costing (ABC) is an alternative method of cost accounting, which assigns costs to products and services based on activities associated with costs in specific processes. ABC allows for a more accurate understanding of the true cost of products and services, better cost planning and control, and improved process efficiency. These factors make ABC an attractive alternative to traditional cost accounting methods.