Abc corrected
- 1. Team Assignment Part 2 Learning Team D (Jihan Richardson, Jonah Targosz, Samantha Evanson, Shanelle Fisher) ACC/349 July 8, 2018 Derrick Flowers
- 2. Terminology used in an ABC costing system • ABC (activity based costing) is an accounting method that is used to trace & assign costs to the overhead activities Through this method overhead, indirect costs end up being assigned to products. • Estimated overhead costs relating to production are usually assigned to products as per a given cost-driver rate A cost-driver is simply a factor that incurs cost and is usually used to allocate indirect as well as variable cost to the output or activities of production e.g. purchase orders, machine setups, quality inspections, maintenance requests, etc. • Overhead costs are costs incurred during production but are not directly related to the manufacturing process of a given product.
- 3. ABC costing & how it differs from traditional costing • Activity based costing (ABC) assigns costs to activities regarded as real causes of overhead first, and then assigns these costs of activities to products that are actually demanding these activities (Srinivasan, 2008). • Unlike ABC costing that classifies activities unrelated to the number of units produced in five levels that include batch-level activity, customer-level activity, unit-level activity, organization-sustaining activity, as well as product-level activity, the traditional costing usually depends on volume count e.g. direct labor hours or machine hours to be able to allocate overhead costs to products. • Secondly, by providing a precise breakdown of the indirect costs, the ABC costing method ends up providing more accurate results than the traditional costing system. • Despite the many advantages associated with ABC costing, it tends to be more costly as well as complex in comparison to the traditional costing system. • However in this case, ABC costing is the best method for Jeemp Farms since the decision arrived at thereafter will have huge implications on the company’s profitability.
- 4. Reference • Jelić, M., Aničić, J., Đurović, J., & Radojičić, S. (2014). ABC COSTING METHOD. FBIM Transactions, 2(1), 91-100. doi: 10.12709/fbim.02.02.01.09 • Srinivasan, P. (2008). Activity based costing. Hyderabad, India: Icfai University Press.
Editor's Notes
- #3: ABC costing is used to trace & assign costs to the overhead activities Through this method overhead, indirect costs end up being assigned to products. Overhead costs relating to production are then assigned to products as per a given cost-driver rate (Jelić, Aničić, Đurović & Radojičić, 2014). As per this explanation of ABC, it is quite evident that the most essential terminology used in ABC costing system are overhead costs as well as cost-driver. Overhead costs are costs incurred during production but are not directly related to the manufacturing process of a given product while cost-driver, is a factor that incurs cost and is usually used to allocate indirect as well as variable cost to the output or activities of production e.g. purchase orders, machine setups, quality inspections, maintenance requests, etc.
- #4: ABC costing ) assigns costs to activities regarded as real causes of overhead first, and then assigns these costs of activities to products that are actually demanding these activities (Srinivasan, 2008). This system differs from the traditional system in several ways. To begin with, ABC costing classifies activities unrelated to the number of units produced in five levels that include batch-level activity, customer-level activity, unit-level activity, organization-sustaining activity, as well as product-level activity, while classification in the traditional costing system depends on volume count e.g. direct labor hours or machine hours to be able to allocate overhead costs to products. secondly, ABC costing method is more accurate than the traditional costing system since it by provides a precise breakdown of the indirect costs. Lastly, ABC costing systm, is more costly as well as complex in comparison to the traditional costing system.