Activity Based Costing Flashcards, test questions and answers

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What is Activity Based Costing?

Activity-based Costing (ABC) is a cost estimation method that assigns overhead costs to individual activities within a business. It is used to identify the true cost of products and services and can help businesses make more informed decisions when it comes to pricing, production, and resource allocation. ABC considers all factors that go into producing an item or service, including direct labor costs, material costs, overhead costs such as rent and utilities, and other indirect expenses. By assigning these costs on an activity basis instead of an output basis, ABC is able to provide a more accurate picture of the real cost of production.The ABC process consists of four steps: identifying activities; determining their associated costs; making allocations for resources used in those activities; and finally calculating the overhead rate per activity. In order to accurately calculate overhead rates using ABC method, it’s important for businesses to break down their activities into smaller tasks in order to isolate specific expenses associated with each one. This will allow them to assign each cost directly back to its related activity. ABC has several advantages over traditional costing methods such as job costing and process costing because it captures all expenses related to a particular product or service without having to estimate usage rates or assign inflated standard figures as with other methods. Additionally, since ABC evaluates activity levels rather than output levels it can help measure performance more accurately by providing information about which areas are most efficient or need improvement. Overall Activity Based Costing can be an invaluable tool for organizations looking for ways to better understand their internal operations and improve profitability by helping them identify wasteful spending habits that could be reallocated towards more productive endeavors.