Management Accounting Research Paper 2022

[MANAGEMENT
ACCOUNTING]
2019

MAS 1
Activity-Based Costing
The aim of this paper is to present a short essay on Activity-Based Costing which is
one of the most successful approaches of management accounting system used by the
businesses to improve process and increase productivity.
Activity-Based Costing is the costing method that classifies activities in a business
and allocates cost from every activity to every service and product as per the actual
consumption of the resources by all. This model allocates overhead and indirect costs to the
related service and product. CIMA has defined this approach as the method of costing and
monitoring of the activities that is comprised of tracing the consumption level of the
resources and costing the final outputs (CIMA, 2008). In the business, this method is applied
by allocating the resources to every activity and activities to the cost objectives depending on
the estimates made related to the consumption. In the last, it use cost drivers to link activity
cost to the output. According to the ICMAB, ABC is the method of accounting that
recognizes the firm activities and allocates indirect costs to the cost objects (Moudud & Huq,
2015).
Activity based costing mostly work in the manufacturing industry as it helps in
improving the cost data consistency, hence generating true costs and superior categorization
of the costs that is incurred by the firm in the procedure of production. The activity based
costing can be calculated by applying the specified formula that is: cost pool divided by cost
driver, which produces the rate of the cost driver. The rate of the cost driver is then used for
the calculation of the overhead amount and indirect costs linked to specific activity (Kim,
2017). For instance, the electricity bill of ABC Company is $50,000 per year. The labour
hour number has direct influence on the bill. For the considered year, the worked labour