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Activity Based Costing

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  • Last Updated : 09 Mar, 2021
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In this, we will discuss the overview of Activity Based Costing, technique, objectives, and a final summary of Activity Based Costing. Let’s discuss each section one by one.

Activity-based costing :
Activity-based costing can be considered as the backbone of ERP concept. The whole idea of ERP concept. The whole idea of ERP is to estimate the total activity costs for particular customer order. In fact, the best practice in ERP is to estimates the revenues and allocate the expenses for particular order. So, in planning ERP is very helpful for managing resources for customers like calculating accurately the margin per customer order. The main concept behind this is the target costing. We can also pronounce in industrial engineering language that ABC is a method that provides therbligs for costing.

Technique :
Let us discuss this technique in detail to understand the concept of ERP. Activity based costing can de defined methodology that measure the cost and performance of activities, Proper resources are allocated to activities. 

  • The activities are then allocate to cost objects based on their use. Activity built cost analysis is different from traditional concepts in a number of ways. 
  • The concept of activity based costing lies in the fact that cost should be planned for and managed before they are incurred, rather than simply monitored and controlled offer the event.

Objectives :
Here, we will see the objectives of Activity Based Costing as follows.

  • The initial objective is to recognize the activities that are performed throughout the organization and to estimate the costs associated with delivering those activities. Then the cause of these costs, called cost drivers, can be identified to provide information, which is very useful in decision-making. 
  • Activity based costing attempts to address the real issues of how and why costs are incurred and does not, therefore, simply record the expenditure and then allocate it arbitrary to cost centers or products. 
  • Traditionally, financial accounting provided external information to shareholders, authorities, creditors and stakeholders, and is unsuitable for internal decision-making. Hence, the limitation of financial accounting are that it analyze profitability by department or cost center and cost by category or type of expense. 
  • A large part of costs are allocated to overheads and therefore complete control over costs is lost.

Note –
Activity based costing enables the management to utilize cost information for the purpose of decisions making at all levels and focus on how the decision will affect the overall profitability of the company. 

Summary :
To summarize, activity-based costing includes as follows.

  • Providing a way of assessing why cost are incurred, rather than how much is incurred.
  • Forming a basis of controlling costs by monitoring the underlying cause.
  • Providing a basis for adjusting costs with activities as a means of focusing attention on cost management.
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