Question

please answer in simple words

OPTION 1) Using what you learned about activity based costing (ABC) in this week's readings, identify and discuss 3 to 5 items that have to be considered when organizations decide to use ABC and must identify drivers relevant to their industry and type of business.

Answer 1

Activity Based Costing:-

Activity based costing is a method of Assignin overhead and Indirect cost to Products, Actually it is the more logical manner than than the traditional approach of simply allocating costs on the basis of machine hours.Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities.

Following items to be considered , when organizations to use Activity Based Costing.

1. Identify all the activities required to create the product.
2. Identify individual cost related to Activity ( Testing, Setting up cost etc.)
3. Assign each cost to cost driver ( No. of inspection, Square feet area, Hours or Units)
4. To get Cost driver rate devide cost by cost driver
5. Multiply the cost driver rate by the number of cost drivers.

Let's take example of Gear Box Manufacturing Industries, where we assign Quality cost & Building (Factory) Depreciation to Products as per following:

Cost Descrption	Total Cost	Cost Driver	Total Driver Base	Cost Rate/Per Unit
Quality Cost	$5,000	No. of Inspection	40	$125
Land & Building Depreciation	$2,000	Square feet Area	87	$23