Question

Identify and evaluate the various uses a business might make from the results of using the ABC (Activity Based Costing )method

Answer 1

Activity-based costing (ABC) is a costing allocation method to allocate the overheads along with the indirect costs (such as salaries, utilities, depreciation and traceable overheads) to the products and services at a micro level by assigning overhead to various cost pools.

ABC provides benefits through enhancing the costing process in three ways:

First, it recognizes the expected cost pools that are being used to build the overhead costs. Thus, in this way the whole overhead is not allocated at plant-wide one pool, but by bifurcating the whole production overhead into cost.

Secondly, through creating new pools, various products/services are taxed towards overheads as per the use of the activities in the production of that product / service.

Thirdly, all the indirect costs in making the product are traced / attached to certain activity or pool. Thus, no merging of the overhead costs, but separate treatment and allocation of the overhead.

Fourthly, activity cost drivers are used in ABC analysis provides more and more accurate distribution of costs and assigns true costs to product / service.

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