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Definition and Explanation of Activity Based
Costing:
Activity based costing (ABC) is a costing
method that is designed to provide managers with
cost information for strategic and other
decisions that potentially affect capacity and
therefore "fixed cost".
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Treatment of Costs Under Activity Based Costing
(ABC) System:
In
traditional cost accounting system, only
manufacturing costs are assigned to products.
Selling, general, and administrative expenses are
treated as period costs and are not assigned to
products.
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Activity Based Costing
and Top Management:
Experts
agree on several essential characteristics of any
successful implementation of activity based costing.
First, the initiative to implement activity based
costing must be strongly supported by top level
managers.
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Activity Based Costing, GAAP and External Reports:
Since
activity based costing (ABC) system generally
provides more accurate product costs than
traditional costing methods, why isn't it used for
external reports?
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Designing and Implementing Activity Based Costing
System:
Experts agree on
several essential characteristics of any successful
implementation of activity based costing system.
First, the initiative to implement activity based
costing must be strongly supported by top
management.
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Targeting Process Improvements:
Activity based costing can be used to identify
areas that would benefit from process
improvements. Indeed, managers often cite this
as the major benefit of activity based costing.
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Advantages, Disadvantages and Limitations of Activity Based Costing:
Activity based costing system help managers
manage overhead and understand profitability of
products and customers and therefore is a
powerful tool for decision making. However
activity based costing has a number of
limitations or disadvantages.
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Activity Based Costing Example:
Ferris
Corporation makes a single product - a fire
resistant commercial filing cabinet - that it
sells to office furniture distributors. The
company has a simple ABC system that it uses for
internal decision making.
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