Activity-Based Costing (ABC) Analysis: A Comprehensive Report

This report provides an overview of Activity-Based Costing (ABC), emphasizing its core principles and applications. It explains how ABC allocates indirect costs more accurately than traditional methods by focusing on activities and cost drivers. The report highlights the advantages of ABC, such as improved cost accuracy, better identification of inefficiencies, and more precise product costing, while also acknowledging the increased complexity and cost of implementation compared to traditional costing systems. ABC helps in the allocation of overhead expenses to products, ensuring that the cost of each product is accurately determined. The report concludes that ABC is a superior method for computing product costs and enhancing management decision-making by providing a more realistic view of costs and profitability. The report also addresses the importance of accurately determining the cost of a product, which is essential for making informed business decisions. References for the report are also provided.

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.

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References
Activity Based Costing. (2019, September 20). Retrieved from www.accountingcoach.com:
https://www.accountingcoach.com/activity-based-costing/explanation
MyAccountingCourse.com. (2019, September 19). What is Activity Based Costing (ABC)? Retrieved
from www.myaccountingcourse.com: https://www.myaccountingcourse.com/accounting-
dictionary/activity-bas
Schmidt, M. (2019, September 19). Activity-Based Costing, ABC Management. Retrieved from
www.business-case-analysis.com: https://www.business-case-analysis.com/activity-based-
costing.h
What is activity-based costing? (2019, September 20). Retrieved from www.patriotsoftware.com:
https://www.patriotsoftware.com/accounting/training/blog/activity-based-costing-small
Woodruff, J. (2019, September 19). The Disadvantages & Advantages of Activity-Based Costing.
Retrieved from smallbusiness.chron.com: https://smallbusiness.chron.com/disadvantages-
advantages-activitybased-costing-45096.