Activity-Based Costing
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Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods. However, some indirect costs, such as management and office staff salaries, are difficult to assign to a product.
Definition
Activity-Based Costing (ABC) is a method of allocating indirect costs and overheads to related products and services. This method recognizes the relationship between costs, indirect activities, and the production of products, providing a more accurate allocation of indirect costs compared to traditional costing methods.
Origin
ABC originated in the 1980s as manufacturing complexity increased, making traditional costing methods inadequate for accurately reflecting the true cost of products. It was developed by scholars like Robin Cooper and Robert Kaplan to improve cost allocation accuracy.
Categories and Features
ABC is mainly divided into two categories: activity-based cost allocation and activity-based management. The former focuses on allocating costs through activity drivers, while the latter uses this information for strategic decision-making. Its features include higher cost allocation accuracy and detailed analysis of indirect costs, but it is complex to implement and costly.
Case Studies
Case Study 1: General Electric (GE) adopted ABC in the 1990s, successfully identifying high-cost non-value-added activities, optimizing production processes, and reducing costs. Case Study 2: Procter & Gamble (P&G) used ABC analysis to discover high indirect costs in certain product lines, leading to adjustments in their product mix and improved overall profitability.
Common Issues
Common issues include high implementation costs, complex data collection, and the need for employee training. Additionally, ABC can result in overly complex cost allocation models, making it difficult to apply in small businesses.
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