Features of Activity Based Costing
There are some features of Activity Based Costing and they are explained as follows:
- The entire cost has been divided into a couple of types and they are variable cost and fixed cost. They are important for proposing quality information required to design an ideal cost system in the manufacturing concerns.
- The correct distinction has been made between various cost behavior patterns.
- The ideal cost driver needs to be recognized to trace the product’s overhead.
- The cost behavior patterns happen to diversity related, volume related, time related, and events related.
- The cost drivers do dictate the pattern of cost behavior.
Benefits of Activity Based Costing
There are several advantages of Activity-Based Costing like:
- Proposes genuine prices of manufacturing for particular products.
- Discovers the processes that have wasted and unimportant costs.
- Determines the profit margins of products more appropriately.
- Allocates manufacturing overhead accurately to items and processes which make use of the activity.
- Proposes improved justification and understanding of costs in manufacturing overhead.
- Recognizes incompetent processes and look for improvements.
How Activity-Based Costing is Different from Traditional Costing?
When the matter comes to accounting, then activity-based costing as well as traditional costing are considered two distinct processes to allocate indirect or overhead costs to items. The job of both these methods is estimating overhead costs associated with production before assigning these costs to items grounded on the cost-driver rate.
However, there are some differences between these two methods and the differences are in the complexity and accuracy of these methods. Traditional costing is considered less accurate and more simplistic compared to activity-based costing.
Commonly, the traditional costing method assigns overhead costs to items grounded on a random average rate. However, activity-based costing is more accurate and complex compared to the traditional cost and this method initially assigns indirect costs to activities before assigning the costs to items based on the use of activities by products.
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