Question

Explain the topic "Overhead costing and activity-based costing" in detail from Managerial Accounting course.

what you have learned from this management accounting topic?

what is interesting in this topic and why?

Answer 1

Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods. It identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each.In this method each different activity, a different cost driver is applied which is best suited for that activity. The cost driver is specifically selected for each activity.

Intesting thing about ABC method of accouting is while allocationg overheads every activity is allocate according to best suitable cost driver which is directly associate with the respective activity.

Traditional costing method

Traditional costing is a costing method used to allocate overhead costs based on a single cost driver according to the consumption of a volume of production resources. This single cost driver can be based on machine hours, labor hours etc. and is used for all the different activities.