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Activity Based Costing Essay

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Below is an essay on "Activity Based Costing" from Anti Essays, your source for research papers, essays, and term paper examples.

Activity Based Costing
Karen E. Plum
Southern New Hampshire University

Activity Based Costing
Activity-based costing (ABC) is a method of examining the costs of an operation and assigning these costs to the products consuming them.   It requires a careful examination of every cost that goes into a product – not just the direct material and labor, but also the cost of developing, shipping, advertising, and selling it; all the costs from the conception of a product until its final delivery to the customer.   Once these costs are defined, they are assigned to products and services.   It is especially useful for companies that have a variety of products and services.   It isn’t a one-size fits all solution, but it a very valuable tool for companies to streamline their operations and fine-tune their pricing strategies.
Implementing an activity-based costing system can be daunting because it requires a very detailed examination of an operation.   It can be very expensive, so the benefit should outweigh the cost of developing the system.   “If ABC is done properly, it helps organizations identify which of their products, clients and activities are most (and least) profitable, and which costs are unnecessary. Phillips, K. (2011).   By helping to identify the most profitable products, it operates as a management tool by enabling decision-makers to see how changing or adjusting certain costs impacts the cost behaviors of other costs. Buys, Green (2006).
A more recent upgrade to the ABC system is called “time-driven ABC.   It uses the basic precepts of activity based costing and simplifies it.   With the time-driven ABC system, there are only 2 components: cost per time unit and unit time of activities. You still need to be knowledgeable about the components that go into providing a product or service, but this makes it easier to cost because it’s an estimate.  The system appears to be adaptable to different units of measure.  You would have to re-adjust your numbers upon...

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