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Activity Based Costing Essay

971 words - 4 pages

ACTIVITY-BASED COSTING 2

The use of Activity-Based Costing (ABC) in the manufacturing of automobiles can have a great benefit for tracking costs that are actually used in the process of manufacturing a certain type of auto. ABC has an impact in job costing when the process is complex and there are many machines or processes used in manufacturing (Activity Based Costing, n.d.). Using the instance of automobile manufacturing, some signs of ABC being a beneficial method can include the ability for management to effectively use cost analysis in their decision-making on a certain model of automobile. By having the ability to track ...view middle of the document...

In doing so,
ACTIVITY-BASED COSTING 3

management would open itself up to having data that is not entirely accurate of cost to the individual product line.
According to Horngren, Datar, & Rajan there is a seven-step process required to implement ABC:
* Identify the products- What is it exactly that you want to track costs of?
* Identify the direct costs of the product- You can identify these costs by looking at expense for the particular product you wish to track
* Select activities and cost allocation for the indirect costs of the product- This is the step where you would break-down the different activities required to get your product manufactured and to market and set into an activity pool base.
* Identify the indirect costs that make up each base- If the base was design of the product this could include salaries of the designers, resources used in design or any activity directly related to the design of the product.
* Compute the rate per unit for each cost-allocation base you will be using- This step is where dollar amounts are assigned to the activities preformed in the manufacture of a product.
* Compute the indirect costs to allocate to the product- The costs associated with design, machine operation, and distribution to name a few.
* Compute the total cost of the product- This step is where all direct and indirect costs are compiled and applied to the manufactured product.
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Four levels of cost hierarchy involved in the ABC method are described by Horngren, et al are:
* Output unit-level costs- Indirect labor used in manufacturing is an activity that can be associated with each individual unit produced.
* Batch-level costs- This can be associated with any activity costs incurred in producing a batch of product such as the cost of acquiring resources to produce the batch.
* Product-sustaining...

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