Activity-based costing: ProcessĪctivity-based costing involves the following steps: It enables companies to improve their cost management and pricing strategies by singling out specific activities that are raising production costs and require improvements. The main purpose of activity-based costing is to allocate specific indirect costs to products to gain detailed insights into product costing and profitability. There are four types of activity-based costing activities: unit-level, batch-level, product-level, and facility-level (across the organisation) activities. It then computes the costs associated with these activities and assigns them to manufactured products. It does this by first identifying all the activities associated with production, such as product design, setting up and operating machinery, product distribution, etc. Activity-based costing: DefinitionĪctivity-based costing is a cost accounting method, which apportions specific overheads to various products produced by the company. Activity-based costing (ABC) resolves this issue by precisely assigning specific indirect costs to several products produced by the company. While traditional costing methods enable firms to allocate indirect costs at a single overhead rate, this method is subpar at best. Pricing your products optimally requires an acute and accurate understanding of your costs of production.
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