Activity-Based Costing: A Better Way to Compute Product Cost

Question 5
ABC costing or activity-based costing principal focus is mainly on identifying the
related activity associated with it in order to process and complete the job. All
activity that are associated with are totally grouped with into a pool that
specifically related to the activity cost driver. Overhead rate is allocated to each
cost pool associated with it that will ultimately be allocated to each of the
individual jobs and products of the company. (What is activity-based costing?,
2019)
The activity-based costing is much accurate and correct form of allocating
indirect cost as compared to other form of costing approach for assignment of
cost. For instance, sometimes it becomes very difficult to allocate the electricity
expenses which is consumed by many different departments without proper
allocation process. (Activity Based Costing, 2019)
Activity based costing is very helpful in allocating all the indirect cost expenses
to the products based on the quantum of activities required to produce the
product. The assignment of overhead expenses to products is extremely very
much important for the management of the company. As sometimes it happen
that if a particular department is in very much profit situation in order to reduce
the profitability of the company excess amount of indirect cost can be assigned
making the department unprofitable in the books of the company.
(MyAccountingCourse.com, 2019)
As compared to traditional costing system, ABC system are more complex and
also very costly to execute, but the activity-based costing system are more
accurate and perfect system of costing. It also provides a very realistic value of
the cost of product and all the indirect and overhead cost are allocated very
properly and accurately. (Schmidt, 2019) It also becomes very easy to identify
the areas were process is very much inefficient and the improvement process to
be done. As the cost of product is determined accurately so the profit figure
arrived at is also very precise and accurate. The ABC costing approach also
identifies the wasted and unnecessary cost associated with and target to
improvement in those areas.
In the present scenario activity based costing should be preferred over other
costing method as it provides a better way to compute the cost of product.