ABC Vs Traditional Encyclopedia.docx

ABC Vs Traditional Encyclopedia.docx - Reference...

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Reference: Activity Based Costing and ABC Management Definitions, Example Calculations, Meaning Explained Business Encyclopedia ISBN 978-1929500109 Updated 2018-02-26 © 2017 Solution Matrix Ltd Companies move to activity based costing to better understand the true costs of goods and services. Activity based costing attempts to measure the costs of products and services more accurately than traditional cost accounting. What is Activity Based Costing? Activity based costing ABC is a method for assigning costs to products, services projects, tasks, or acquisitions, based on Activities that go into them. Resources consumed by these activities. ABC contrasts with traditional costing ( cost accounting) , which sometimes assigns costs using somewhat arbitrary allocation percentages for overhead or the so-called indirect costs. As a result, ABC and traditional cost accounting can estimate cost of goods sold and gross margin very differently for individual products. Contradictory and uncertain cost estimates can be a problem when management needs to know exactly which products are profitable and which are selling at a loss. What Are the Benefits of ABC? Cost accountants know that traditional cost accounting can hide or distort information on the costs of individual products and services—especially where local cost allocation rules misrepresent actual resource usage. As a result, the move to ABC is usually driven by a need to understand the "true costs" of individual products and services more accurately. Companies implement activity based costing in order to: Identify individual products that are unprofitable. Improve production process efficiency.
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Price products appropriately, with the help of accurate product cost information. Reveal unnecessary costs that can be eliminated. Firms that use ABC consistently to pursue these objectives are practicing activity based management ABM . ABC Impacts the Same Accounts, But With Different Mathematics Note that the purpose of ABC is to provide information for decision support and planning. ABC by itself usually has little or no impact on the structure of the firm's financial accounting reports (Income statement, Balance sheet, or Cash flow statement). This is because both ABC and traditional costing ultimately assign costs to the same existing accounts. The two approaches simply use different mathematics to do so. Note especially, however, that ABC sometimes brings improvements in reported margins and profitability. These outcomes follow when ABC reveals unnecessary or inflated costs, or when ABC shows where to adjust pricing models, work flow process, or the product mix. Explaining Activity Based Costing in Context This article further defines, explains, and illustrates activity based costing using example calculations to contrast ABC with traditional cost accounting. Examples appear in context with related terms from the fields of budgeting, cost accounting, and financial accounting.
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