Activity-Based Costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services.
Absorption costing, also known as full absorption costing or total absorption costing, is a cost accounting method where all overheads of an organization are charged to production by means of absorption.
Absorption costing is a methodology used to allocate all manufacturing costs to the production units. It is generally used in traditional costing systems.
Absorption rate, also known as overhead absorption rate or recovery rate, is a crucial concept in absorption costing systems used to allocate overhead costs to production. This detailed guide covers the calculation methods, usage, and comparisons with modern costing systems.
In activity-based costing (ABC) systems, an activity refers to any operation performed within an organization that causes costs to be incurred. Examples include processing an order, writing a letter, designing a product, and visiting a customer. This concept is integral to accurately allocating costs based on actual activities.
Activity Analysis is an essential component of Activity-Based Costing (ABC) that involves identifying and describing activities within an organization, alongside their resource requirements.
An activity dictionary is a comprehensive listing of all activities included in an organization's activity-based costing (ABC) system. It provides precise definitions to help managers calculate the costs for each activity, thereby aiding in cost management and control.
An activity measure in activity-based costing (ABC) systems is a metric that gauges the volume or rate of an activity. It serves as a basis for cost allocation within an activity cost pool, correlating changes in the measure with changes in total activity cost.
Activity-Based Costing (ABC) is an accounting method of cost allocation that assigns costs to products and services based on the activities and resources that they consume.
Activity-Based Costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each.
Activity-Based Management (ABM) involves using insights gained from Activity-Based Costing (ABC) to improve the overall management and efficiency of an organization. It focuses on identifying activities, understanding cost drivers, and analyzing how resources are consumed based on activity levels.
An arbitrary allocation refers to a cost allocation process that uses an allocation base unlikely to yield accurate costs. Examples include using the number of students to allocate the cost of a lecture, irrespective of the class size.
Batch-level activities refer to tasks or processes that are performed each time a batch of units is produced, regardless of the number of units within that batch. These activities are essential for economies of production, particularly in manufacturing settings.
Cause-and-effect allocation is a cost allocation method where the allocation base is a significant determinant of the cost. This method ensures accurate assignment of indirect costs to cost objects.
Cost allocation is the process of assigning indirect costs to specific cost objects in a way that reflects resource consumption. This is crucial for making informed decisions, setting prices, and measuring profitability.
Cost Assignment or Cost Attribution refers to the procedures by which direct or indirect costs are charged to or made the responsibility of particular cost centers, and ultimately charged to the products manufactured or services provided by the organization.
In a system of activity-based costing, any factor such as the number of units, number of transactions, or duration of transactions that drives the costs arising from a particular activity. When such factors can be clearly identified and measured, they serve as the basis for allocating costs to cost objects.
Techniques and procedures in cost accounting and management accounting to obtain the costs of services, products, processes, and cost centers for decision making, planning, and control.
Customer Profitability Analysis (CPA) evaluates the profitability of each customer or segment to help businesses focus on value-adding customers and optimize resource allocation.
Customer-level activities are tasks carried out to support specific customers and generate customer-related value.
Duration Driver refers to a measure of the amount of time required to perform an activity, especially when there is significant variance in the time taken to complete different activities.
In activity-based costing, a facility-sustaining activity is an activity that is performed to sustain the organization as a whole. Examples of such activities include security, safety, maintenance, and plant management. These costs cannot be directly traced to specific products.
The costs of production when charged to the cost units and expressed as costs of individual products. Product costs may include both direct costs and indirect costs (overhead); many different costing methods, such as absorption costing, activity-based costing, and process costing, are used in computing product costs.
Product-sustaining-level activities are activities that are necessary to support a specific product regardless of the volume of production. These activities ensure the possible production and effective marketing of the product.
Rate per machine hour is a basis used in absorption costing for absorbing manufacturing overhead into cost units produced, providing insights into the operational efficiency and cost management within a manufacturing setup.
A basis used in absorption costing for absorbing manufacturing overhead into the cost units produced.
A single-capacity system in accounting refers to an accounting structure in which each activity or cost element is identified as serving only one purpose—either serving as a cost center or a revenue generator. Unlike the dual-capacity system, the single-capacity system does not recognize dual roles for cost centers or activities.
Traditional costing systems are methods used to allocate indirect costs (overheads) to products, but they may not offer accurate product cost information due to their arbitrary allocation methods. These systems have strengths such as simplicity and cost-efficiency, but weaknesses include lack of precision in contemporary multiproduct environments.
