ABC Offers A Structure and Methodology That Enables Management To Understand
ABC Offers A Structure and Methodology That Enables Management To Understand
ABC Offers A Structure and Methodology That Enables Management To Understand
Definition
Activity-based costing (ABC) is an accounting method that identifies the activities that a firm performs
and then assigns indirect costs to products. An activity-based costing (ABC) system recognizes the
relationship between costs, activities and products, and through this relationship, it assigns indirect
costs to products less arbitrarily than traditional methods.
Activity-based management (ABM) utilizes the data gathered by activity-based costing methodology
to
Activity-based costing (ABC) is mostly used in the manufacturing industry since it enhances the reliability
of cost data, hence producing nearly-true costs and better classifying the costs incurred by the company
during its production process.
The Role of the Management
Management accountants can perform an important role in the design of an ABC system. Based on
their skills and training, they can help identify what is appropriate for analysis (product, customer,
process, etc.) and explain the probable causes of an existing cost system’s deficiencies. In addition,
based on their detailed knowledge of the information in their company’s costing information systems,
they are uniquely qualified to judge the level of aggregation appropriate to the ABC costing system. They
can use their under-standing of costing methods to recommend appropriate methodologies for the
assignment of costs to activities and cost objects. Finally, they will be able to use their understanding of
thein formation and cost relationships to support the system once it is implemented.
Activity – Group of tasks which are a combination of elements of how work is performed.
Standard Cost – Standard cost is predetermined cost based on normal conditions of efficiency and
volume of production.
Planned Cost – Output from a planned cost approach is a set of theoretical, what-if assumptions
providing the basis for computing activity cost in an effort to achieve a predetermined goal.
Engineered Cost – derived from an industrial engineering study that provides insight into how an activity
is performed and whether any method and/or work flow improvements can increase performance
and/or reduce cost.