Activity-based costing (ABC) is a costing method that recognizes doings in a business and allocates the cost of every doings with capital to the entire products and services in accordance to the real expenditure by every product and service (Kaplan & Bruns, 1987). ABC allocates extra indirect expenses into direct overheads.
A company that needs to switch to the Activity-Based Costing System methodology should centers on the cost distribution in operational administration in order to help them separate overhead cost, variable cost and fixed cost. When separation of cost gets attained it assists the company to recognize cost drives (Drucker, 1999). Direct distribution of indirect costs to products is more difficult compared to allocation of direct labor and material. As a result, for the management to recognize cost drives where products utilizes similar resources in a different way, some kind of weighting gets required in the cost distribution procedure. The cost drives therefore, can get defined as an aspect that makes or drives the price of the activity (Drucker, 1999). For instance, if company consists of activities of running machinery, the drive is probable the machine operating hours. It is clear that, in such a company, the machine operating hours drive power, labor, and preservation cost for the duration of the running machinery activity.
The company needs cost of needed data capture for the Activity-based costing system (ABC) to be applicable. However, if ABC gets well applied, it gets utilized by organization as a tool for comprehending customer and product cost and their productivity depending on the production procedure. Once implemented, ABC will get utilized to hold up tactical verdicts like pricing, outsourcing, classification and evaluation of procedure development initiatives.
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