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ABC is method that lists and measures the cost of each activity that facilitates the production to present the merchandise and service to client.
This leads to a fairer and more accurate way of charging overheads to the products.
The traditional methods ignore the detail of many of the activities that actually take place.
the cost driver for materials ordering would be the number of orders placed, the cost driver for set-up costs would be the number of production runs etc.
After the cost drivers have been identified then each cost driver’s overheads are collected together. Each pool is then divided by its driver, for example all overheads in the cost pool for the materials ordering process would be divided by the number of orders placed to give a value for the cost of placing an order.
ABC delivers more specific information than traditional accounting system because it identifies the relationship between the cost driver and the activities associated with the production of that merchandise.
It helps to detect those activities those are non-efficient and does non add value to the public presentation of the activity ; therefore it helps the organisation to work the chance to cut down cost and maximise net income.
ABC is an ideal manner to pull off activities and better the quality of activities by inquiring “ why ” and “ how good ” activities are adding value to merchandises and services. The chief concern in the field of accounting is to detect the different factors that contribute the success of direction accounting system.
Activity Based Costing ( ABC ) is to a great extent used in the direction accounting for more than a decennary.
Overhead costs are attributed to products on the basis that it is activities that cause costs to arise.
These activities might include, for example: * Materials ordering * Materials storage * Setting up production runs * Testing the quality of production * Production scheduling Each activity can be identified with a cost driver e.g.