Activity Based Accounting Essay

695 WordsMar 4, 20143 Pages
Activity Based Accounting For many industries activity based accounting is the best method to track and calculate the expenses in the production process. “Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours” ("Introduction to activity," 2004). This method works best for manufacturing companies or companies that are able to distinguish the cost associated with each step of the process. As with any accounting method there are pros and cons to activity based costing. One of the biggest advantages to activity based accounting is that the company is able to spot the item that brings in the most profit. By having each cost broken down per step in the completion process of a unit one will have a clear picture as to what the actual cost of the item is. Another advantage to this system is that you are able to see if any items are not providing enough of a profit and tells one how much they should be charging for the product. For the right company using this accounting method is the best way to manage and control the expenses associated with the production of your item (Horngren & Datar, 2012). There are some disadvantages to using activity based costing. One of the biggest disadvantages is that for an established business it is very costly to start up and implement the activity based accounting system. Unless you are in in a common industry many times the program has to be developed as you go to suit the needs of your business. Sometimes activity based accounting does not always conform with GAAP. If this is the case and the company really wants to use this system they will in turn operate with two accounting methods. The activity based accounting method would be an internal document and not intended for the public eye. As an

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