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Activity-Based Costing

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Christine Mosqueda
ACC 310: Cost Accounting
Activity-Based Costing
Instructor Bradley Johnson
December 17, 2012

Activity-Based Costing
In business, there are two separate costing methods that a firm can use. One of those methods is called traditional costing system and the other is activity-based costing. Activity-based costing (ABC) is a costing method that focuses on identifying activities which allocates the costs of each activity a firm uses. From our text, it identifies Activity-based Costing as “a two-stage product costing method that assigns costs first to activities and then to the products based on each product’s use of activities” (Lanen, 2011, p. 329). A firm employing such a system provides a better understanding of the goods and services that it uses. Developing such a system in a firm comes from proper planning. When developing a firm, it is effective to follow certain steps to identify the process to attain the goals the firm has set. At times, many firms set certain examples by the managers to help understand the direction in which the firm is heading to become more effective. Activity-based costing is not only an effective way to run a business but as the individuals involved in the business become more aware of how to use this type of method, activity-based costing then becomes a strategic method in which a business could then make future developing ideas in which the company can expand. Activity-based Costing (ABC) is a costing method that focuses on identifying activities then allocates the cost of specific activities the firm carries out. This method of costing confirms that the costs are accurately distributed to the products or services that allocate them. ABC demonstrates costs more effectively, making it relevant for management to improve on decisions associated with certain activities. When the ABC method is utilized in a firm, it extends the decision-making abilities of management by broadening on traditional costing techniques. According to The International Journal of Educational Management, it stated that “Activity based costing provides a technique that allows for a more accurate cost determination than that of traditional systems when dealing with multiple product lines” (Simmons, Wright, & Jones, 2006). There are more benefits using the ABC method than a traditional costing system. One of the benefits that an ABC method has is that this type of method is more accurate than a traditional costing method. The reason it is more accurate is because the ABC method uses a separate assign rate for each activity. For example, when a company has multiple assigned jobs, it is better for a company to use an ABC method because it will show the exact cost of each activity. This is a benefit because when it comes to effectively planning the order in which the business will be ran the owners can look at the assigned categories and determine which order will produce the most effective manor in completing each job. This method also is a benefit when it comes to determining how much profit per job each particular activity will produce. This method is better than traditional method because in the traditional method somewhat adds everything into one lump sum then divides it by a single rate. This not only does not allow the business to look at individual activities but also misleads the company to believe that each activity is equal in profit margin. Many companies use the ABC method because it has advantages over traditional method. When a firm employs an ABC system, it provides a better understanding of the cost of goods or services that it uses. As stated by The Journal of Bank Cost & Management According, it says “By employing activity-based costing, a financial institution can gain greater understanding about the costs associated with a product or service and be assured that the overhead costs are being allocated properly” (Raihall & Hrechak, 1994). This system allows businesses... Show More

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