respond to the discussion In the IMA article, Activity-Based Costing (ABC) is explained as a cost allocation
Question:
respond to the discussion
In the IMA article, Activity-Based Costing (ABC) is explained as a cost allocation technique that traces indirect costs (often referred to as "overhead") to specific cost objects such as products, services, and customers. ABC achieves this by: Identifying Resource Consumption and Allocating Costs Proportionally. ABC helps organizations understand where their costs are coming from and how they relate to the activities that drive those costs. n order to overcome the over-generalizations of traditional costing systems, with their excessively simplified cost allocations and resulting lack of visibility for indirect costs, organizations have been adopting activity-based costing (ABC) systems (IMA, 2014) . I like the example that the IMA gives when simplifying ABC systems. The scenario is you and a friends go to dinner, you order a salad and they each order the most expensive item on the menua prime rib steak. When the server brings the bill, the others say, "Let's split the check evenly." Traditional costing methods often fail to establish a clear and accurate relationship between how products or service lines uniquely consume expenses, leading to distorted product costs. ABC, on the other hand, rectifies this issue. It does so by treating each product or service line independently, much like a restaurant server providing separate checks for each patron. ABC systems can have a significant impact on managerialaccountants by affecting time, quality, service levels, risk, capacity planning, and costs. What I learned from the reading is it allows managers the ability to be more specific and pin point true cost of products and services. With the extra knowledge, management accountants can link quality-related costs to specific activities and products or services. Being able to assign cost and time to a specific product is so important because it can help shift focus on areas that need more attention which can get rid of wastefulness. It can also bring to light the true cost of such items.
Institute of Management Accountants (IMA). (2014).Implementing activity-based costing[Report].https://www.imanet.org/insights-and-trends/strategic-cost-management/implementing-activity-based-costing?ssopc=1
Understanding financial statements
ISBN: 978-0136086246
9th Edition
Authors: Lyn M. Fraser, Aileen Ormiston