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Activity Based Costing

Essay by review  •  March 1, 2011  •  Essay  •  942 Words (4 Pages)  •  1,002 Views

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Activity Based Costing

In managerial accounting, the topic of activity-based costing plays a very important role. This concept has been adopted by a variety of manufacturing, service, and nonprofit organizations across the world. Because activity-based costing is used as a supplement to the typical costing system, an individual needs to become more aware of what exactly activity-based costing is, the components of activity-based costing, and steps for performing activity-based costing. With a better understanding of this concept, an individual will become more aware of how to allocate their resources within the company more accurately.

Understanding exactly what activity based costing is, is extremely important. According to the Activity Based Costing Portal, "activity-based costing is a costing model that identifies the cost pools, or activity centers in an organization, and assigns costs to products and services (cost drivers) based on the number of events or transactions involved in the process of providing a product or service." Typically, the costs among the organization are divided and directed to the particular job or product. By connecting the activities with the jobs, the cost of the activities are better allocated to the particular jobs and products. Understanding activities is essential in order to improve the business process, since the activities are one of the main aspects within the business process. When the workforce better understands the activities, they will better understand why the particular cost is associated with such an activity. Activity-based costing also tells people within the company how to spend the money, and exactly what to do with it. The capability to put costs on activities allows for a vast improvement among the organization. The activity-based costing systems allows clients to distinguish the value and need of a particular activity by getting rid of the excess waste that may linger.

There are many components included in activity-based costing. Before undergoing an activity-based costing system, a starting point is needed for the organization. In many of these organizations, a baseline is used in order to provide documentation of the policies, methods, costs, and their relationships with other businesses around the surrounding areas. Because the activity-based costing is the only way to improve the methods that provide the unit costs, base lining is very important in order to identify the activity inputs and outputs. The Business Process Improvement states, "an important function of ABC is for the organizations activities to be defined as added value or non-value added." The value added activities are those that the consumers are prepared to pay for the particular service. Non-value added activities are wasteful, and add extra costs that the consumer is not ready to pay for. Activity-based costing enables an organization to see the actual dollar amount against the certain activities, and finds ways in order to reduce the costs or dispose of the activity as a whole. The Business Process Improvement describes the techniques of activity-based costing as, "capturing the current cost of performing an activity, targeting high cost activities, providing a context for establishing and measuring performance measures, providing a link between activity modeling and economic analysis, and forecasting financial baselines." The components of activity based costing are very important, this enables one to better understand how activity based costing typically works and what information is included

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