Activity-based costing (ABC)

Activity-based costing (ABC)

Description/Paper Instructions

Activity-based costing (ABC)

Activity-based costing (ABC) is a costing method 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. Therefore, this model assigns more indirect costs (overhead) into direct costs compared to conventional costing.

ABC is a more sophisticated method of costing than traditional costing methods, such as job-order costing or process costing. Traditional costing methods typically allocate overhead costs to products based on a single factor, such as machine hours or direct labor hours. This can lead to inaccurate product costs, as it does not take into account the different activities that are required to produce different products.

ABC, on the other hand, identifies the different activities that are required to produce a product and then assigns the cost of each activity to the product based on the amount of the activity that the product consumes. This results in a more accurate product cost, as it reflects the true cost of producing the product.

There are four types of activity-based costing activities:

Unit-level activities are activities that are performed each time a unit of product is produced. Examples of unit-level activities include setting up a machine, inspecting a product, and packing a product.

Batch-level activities are activities that are performed each time a batch of products is produced. Examples of batch-level activities include ordering materials, setting up a production line, and moving a batch of products from one department to another.

Product-level activities are activities that are performed to support a particular product or product line. Examples of product-level activities include designing a product, marketing a product, and providing customer support for a product.

Facility-level activities are activities that are performed to support the entire organization. Examples of facility-level activities include maintaining the building, providing security, and managing information technology.

To implement ABC, an organization first needs to identify all of the activities that are performed in the organization. Then, the organization needs to estimate the cost of each activity. Finally, the organization needs to assign the cost of each activity to the products or services that consume the activity.

There are a number of advantages to using ABC. First, ABC can provide a more accurate product cost than traditional costing methods. This can be important for making pricing decisions, evaluating the profitability of products, and identifying areas where costs can be reduced. Second, ABC can help an organization to better understand its cost structure. This can be helpful for making strategic decisions, such as whether to outsource production or invest in new technology.

However, there are also some disadvantages to using ABC. First, ABC can be more complex and time-consuming to implement than traditional costing methods. Second, ABC can require a significant amount of data collection and analysis. Third, ABC can be difficult to use for products that are not well-defined or that have a high degree of variability.

Overall, ABC is a more sophisticated costing method than traditional costing methods. It can provide a more accurate product cost and help an organization to better understand its cost structure. However, ABC can be more complex and time-consuming to implement than traditional costing methods.

Here are some examples of how ABC can be used:

A manufacturing company can use ABC to determine the cost of each product. This information can be used to set prices, make pricing decisions, and evaluate the profitability of products.

A service company can use ABC to determine the cost of each service. This information can be used to set prices, make pricing decisions, and evaluate the profitability of services.

A government agency can use ABC to determine the cost of each program. This information can be used to allocate resources, make budget decisions, and evaluate the effectiveness of programs.

ABC is a powerful tool that can be used to improve the accuracy of product costing and to make better business decisions. However, it is important to note that ABC is not a magic bullet. It is a tool that must be used in conjunction with other business intelligence tools to achieve the desired results.

Activity-based costing (ABC)

RUBRIC QUALITY OF RESPONSE NO RESPONSE POOR / UNSATISFACTORY SATISFACTORY GOOD EXCELLENT Content (worth a maximum of 50% of the total points) Zero points:  Student failed to submit the final paper. 20 points out of 50:  The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. 30 points out of 50:  The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately.  Elements of the required response may also be lacking. 40 points out of 50:  The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples.  The answer is complete. 50 points:  The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples.  No aspects of the required answer are missing. 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And/or there is a significant use of highly questionable sources. 15 out 20 points:  Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented.  APA 6th Edition is used with only a few minor errors.  There are minor errors in reference and/or citations. And/or there is some use of questionable sources. 20 points:  Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented.  APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. Grammar (worth maximum of 20% of total points) Zero points:  Student failed to submit the final paper. 5 points out of 20:  The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors  10 points out 20:  The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors 15 points out of 20:  The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage. 20 points:  The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free. Structure of the Paper (worth 10% of total points) Zero points:  Student failed to submit the final paper. 3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6th edition requirements whatsoever. 5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements.  The student also significantly writes too large or too short of and paper 7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment. 10 points: Student provides a high-caliber, formatted paper. This includes an APA 6th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper.
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