Question

You are the managerial accounting wizard. You manage a company. It can be in the manufacturing or service industry. Tell me about your product and how you would apply Activity Based Costing (ABC)

Answer 1

There are two main different costing systems which are called Traditional Costing System where overheads are applied to the products based on predetermined overhead rate that is calculated based on the direct labor hours or machine hours etc. and the one is called Activity Based Costing (ABC) system where the overheads are applied to the products based on the each respective activity.

For example, setups costs are assigned to the products based on the number of setups, ordering costs are assigned based on the number of orders etc. Due to this, the overheads are correctly and reasonably applied based on their respective cost driver.

In this question, i choose a manufacturing company and the product is mobile phone.

The ABC is applied in case of overheads where there are different costs as discussed above are incurred during the manufacturing of mobiles but to decide the price of each mobile, we need to know how much cost is incurred to each phone so in order to know that the ABC system is used where all costs are assigned to each phone based on their respective cost drivers as explained above.

Therefore, the ABC system is used for the products for allocating different costs.