Activity Based Costing System
A Tool for Management to Aid Decision Making:

Learning Objectives:

1. Define and explain activity based costing (ABC) system.
2. How various manufacturing and non-manufacturing costs are treated under activity based costing system?
3. What are advantages and disadvantages of ABC system

Definition and Explanation of Activity Based Costing System:

Activity based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore "fixed cost". Click here to read full article

Treatment of Manufacturing, Non-manufacturing and Idle Capacity Costs Under Activity Based Costing System:

In traditional cost accounting system, only manufacturing costs are assigned  to products. Selling, general, and administrative expenses are treated as period costs and are not assigned to products. How ever, many of these non-manufacturing costs are also part of the costs of the producing, selling, distributing, and servicing products. Click here to read full article

Activity Based Costing And Top Management:

Experts agree on several essential characteristics of any successful implementation of activity based costing. First, the initiative to implement activity based costing must be strongly supported by top management. Second, the design and implementation of activity based costing system should be the responsibility of cross functional team rather than of the accounting department. Click here to read full article

Activity Based Costing System and External Reports:

Since activity based costing generally provides more accurate product costs than traditional costing methods, why isn't it used for external reports? Some companies do use activity based costing in their external reports, but most do not. Click here to read full article

Designing and Implementing Activity Based Costing System:

For designing and implementing activity based costing system, management should carefully study the existing cost accounting system and review the articles in professionals and trade journals. In most of the organizations, the new activity based costing system supplement, rather than replace, the existing cost accounting system, which continues to be used for external financial reports.

Targeting Process Improvements (Activity Based Costing + Activity Based Management)

Activity based costing can be used to identify areas that would benefit from process improvements. Indeed, managers often cite this as the major benefit of activity based costing. Activity based management (ABM) is used in conjunction with the activity based costing to improve processes and reduce costs. Click here to read full article.

Advantages or Benefits | Disadvantages or Limitations of Activity Based Costing System:

Activity based costing system help managers manage overhead and understand profitability of products and customers and therefore is a powerful tool for decision making. However activity based costing is not without limitations. Click here to read full article.

Activity Based Costing Example:

Ferris Corporation makes a single product - a fire resistant commercial filing cabinet - that it sells to office furniture distributors. The company has a simple ABC system that it uses for internal decision making. Click here to read full article

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