In any firm, pricing a product is said to be a crucial decision that either brings huge success to the business or damages the company’s image. In accounting, Pricing is done using two methods, i.e traditional and activity-based. In earlier times, major business firms focused on the traditional costing system product costing done using cost tracing of the product and then the indirect cost will be allocated using the cost centre.
Activity-based costing is another effective solution to calculate necessary goods which go into product formation for instance the cost of goods sold. Activity-based costing is a lengthier process than any other method and thus requires sufficient use of resources allocation and whether it is used. This will consume a lot of spare time as the complexity once you reach the middle.
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What is Activity Based Costing?
The activity-based costing is termed as a system which is solely based on spending capabilities on the resources and then creating goods and service finally delivering to customers
Under this method, first, we calculated indirect cost concerning each activity of the operation, then determining the actual cost to product and service and some other cost objectives needed to complete the activity-based costing
According to the accounting essay rewriter, this method includes both direct and indirect cost which is generally needed for decision making, hence no activity will be escaped during system formation.
It is also identified by the professional writer, this method often exaggerates cost allocation beyond product process, for instance, customer services, designing, marketing process ordering service. However this might seem more complex, but the actual result will definitely be reliable for decision making. At any stage of the accounting based costing system, if you find difficulty, then don’t forget to get assistance from SourceEssay online assignment tutor.
Most of the company opting ABC system determines costs are group based on the activities incurred within the organization.
There is a term cost driver defined as activities transactions or absorption rate also known as cost determinant. Let’s understand this term- those costs associated with, procurement storing, ordering, marketing namely are all included in the cost drivers and cost pool. That means the ABC system focuses on identifying cost drivers that play an essential role in decision making. If you find difficulty in recognizing the cost driver within your case study, then take instant accounting assignment helpfrom SourceEssay experts today.
Cost Allocation in ABC System
As defined by the assignment rewriter, the ABC system follows two approaches
How Cost Traced Under The ABC System?
At the first step, it is necessary to define all the cost that leads to overhead cost. In general terms, Overheads are those costs which are not directly utilized in the forming products.
These can be production volume activities and grouped in the cost pool but not utilized further. Some of the common activities that must be part of the ABC system are described in the given below table summary-
| Cost Activities | Incurred Cost | Cost driver |
| Purchasing order and materials | Labour cost will determine the ability to purchase the cost | Calculate the order of numbers processed |
| Handling Equipment and resources | Labour cost handling for material | Requisite materials |
| Material and Parts inspection | Labour cost those performing inspection | Analysis of number of receipts |
| Settling equipment’s | Labour cost associated with Settling equipment’s | Numbering steups |
When cost is determined as per its effectiveness, then it is required to assign cost drivers to measure all the activity. In the first step, measuring cost activity would not be possible hence you might need possible help from SourceEssay essay writing help experts.Don’t feel hesitant and get in touch with our writers anytime.
Being said by prominent accountants, all machines and labour hours are related to volume. But some activities don’t link with volume production based activity.
ABC System- Steps involved in Cost Allocation
- At the very beginning identified all the activities necessary for decision making
- Determine each activity cost pool and cost driver and total overheads
- Assign activity cost pool to the cost drivers that can be in the form of units, hours length and much more
- Divide cost pool overhead with each cost drive so that the cost driver rate could be determined. You can also take assistance from Prominent essay writers at this step.
- At last compute a number of units, hours and parts and then multiply the numbers with the cost driver rate.
Why does Business use the ABC system?
- It will help in calculating actual cost driver and product cost which shown cause and effect relationship among activities
- Through its utilization, the company get deduce the cost which is not necessary
- It is based on cost drivers rather than product volume concepts. With this students can determine overheads under the areas of managerial responsibility
- This will improve the managerial decision-making process
- With the ABC system future resource allocation could be easily determined.
- This is solely focused on changing activities and their relevance and exerts a direct influence on the management system. If you want more about the ABC model, you can also take assistance from an online assignment helpprofessional of SourceEssay
What Makes ABC System Difficult To Understand?
- It can increase the cost and a large number cost pool is being involved
- It could be difficult to implement in a large organization
- It produces enough difficult to determine the determinant of the cost
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