In a 4-5 page paper, discuss the following:
- The importance of cost pools and drivers and their application in the ABC method.
- Give an example of activity-based costing methods by creating a fictitious company. Include a cost analysis.
- Discuss the 2-3 advantages of the ABC method.
- Be sure that the paper has no spelling or grammatical errors
make sure to use more articles verse website searches
Explanation & Answer
Running Head: ACCOUNTING
The identification of company activities and then assigning relevant costs that will be incurred in
the operations as result of the expenditures is activity-based costing. This activity goes further to
reveal the relationship existing in the production process, significant actions and the critical costs
whether direct or indirect. Complexities that exist in certain types of costs allocation make the
application of this cost activity an ideal process for particular industries for instance in the
manufacturing industry it has been most prevalent and straightforward to apply. In the
manufacturing industry, it is activity-based costing that has found utility because of its reliability
in enhancing the classification process of the cost data that is under consideration when
allocations are carried out (Dong, 2014).
It is vital to take note that the costing systems can reveal hidden issues that cannot be exposed
through financing procedures, such activities include; product costing, target costing, consumer
profitability analysis, service pricing and product profitability analysis. Activities in this
circumstance imply any form of task or an event that aims a specific goal, for instance setting up
machines, distribution of goods and services upon completion, maintenance requests, quality
inspections, machine time, production orders and purchase orders (Dong, 2014). All these are
significant drivers under the classification of activity-based costing.
Importance of cost drivers and pools and their application
Cost drivers as earlier mentioned are playing an essential role in making sure that all costs
whether direct or indirect are adequately apportioned, improvement in costing systems are
primarily under three considerations, these are; in the accumulation of overhead expenses, the
number of overhead costs usually increase (Monroy, 2014).
It also changes the basis of
assigning overhead cost...