Question

You are the managerial accounting wizard. You manage an automotive industry. Explain how you would apply Activity Based Costing (ABC)

Answer 1

Activity Based costing or ABC analysis is a costing tool which enables to allocate cost of enablers based on the cost drivers. It is used to gain better understanding of the resources consumed and costs incurred for a certain activity. In an activity based costing, costs are segregated into unit and non-unit based categories. Activity based costing acknowledges that some costs vary with units produced and some costs do not. It also admits that costs which does not vary with production units are fixed based on production volumn changes. ABC analysis gives more accurate determination of costs because it seperately identifies and traces non-unit based costs to product rather than combiing them in a pool of fixed costs as volumn based approach does.