It is very important to find out the things that determine the cost of an activity. Cost drivers or cost objects are the factors that impact the cost of a particular activity. The identification of cost components is the cost drivers involved in different activities. In this step, activities are identified for the allocation of cost. Therefore, it is very necessary to point out the activities associated with the production of the product to allocate the incurred expenses. The method of ABC costing is based on the activities performed during the production of the product or delivery of the services. So, resources mean expenses that are to be incurred at each activity, which will be allocated first to the activity, and then to the product. Identifying resources means finding out the possible expenditure of the organization, which is to be assigned to the cost of the product. In developing the ABC method of cost, several steps are needed to be followed: What are the steps involved in setting up the Activity- Based costing? In this system, apart from the cost of the product, other objects or activities involved in the production process can be ascertained, like costs incurred under customer segments, distribution, packaging, etc. Here only the cost of production of products can be ascertained. In this system, the costs are assigned to the production activity factors. In this system, the cost is allocated to the cost centres or locations where costs are incurred. Here the cost is assigned to all the activities included under the manufacturing hierarchy, like Unit level, batch level, product level, and facility level. It consists of only two types of activities they are Unit level activities and Facility level activities. In this system, the overhead expenses are assigned to production activities or passed to cost pools. In this, the overhead expenses are first allocated to departments or units.
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