Activity-Based Costing (ABC) Elements
Activity-Based Costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This method recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs less arbitrarily than traditional costing methods.
Key Facts
- Activities: Activities are any events, units of work, or tasks with a specific goal that consume overhead resources. They can include activities such as machine setups, maintenance requests, quality inspections, or production orders.
- Cost Pools: Cost pools are created by grouping individual costs related to specific activities. These cost pools represent the total overhead costs associated with each activity.
- Cost Drivers: Cost drivers are used to allocate the overhead costs from the cost pools to the products or services. They are the basis for assigning costs to cost objects. Cost drivers can be transaction drivers (counting how many times an activity occurs) or duration drivers (measuring how long an activity takes to complete).
- Cost Driver Rate: The cost driver rate is calculated by dividing the total overhead in each cost pool by the total cost drivers. It represents the amount of overhead and indirect costs related to a particular activity.
- Cost Objects: Cost objects are the final results of the activities performed by an organization. They represent cost information grouped by profitability dimensions such as products, customers, or channels. Cost objects are the focal point of profitability analysis.
These elements work together in the Activity-Based Costing system to provide a more accurate and detailed understanding of costs, allowing companies to make informed decisions regarding pricing, product profitability, and cost management.
Elements of Activity-Based Costing
- ActivitiesActivities are any events, units of work, or tasks with a specific goal that consume overhead resources. They can include activities such as machine setups, maintenance requests, quality inspections, or production orders.
FAQs
-
What are activities in ABC?
**Answer:** Activities are any events, units of work, or tasks with a specific goal that consume overhead resources. They can include activities such as machine setups, maintenance requests, quality inspections, or production orders.