Activity-based costing is useful in arriving at more realistic product cost information for financial reporting. However, it can also be used to help control costs in all areas of a business. The authors explain the basic premise, give an example of how it works, and show how it can be used to help managers develop successful strategies in running the business.
Cost information is good within the bounds of an accounting system, but for running the business it's of little value." Anonymous plant general manager.
Product costs are routinely calculated for inventory valuation, a critical element of externally published financial statements. While required for GAAP financial reporting, such information is of limited use to managers who run the business. Running the business means making important decisions such as product mix, product pricing, and product emphasis. Activity-based costing (ABC) provides managers with useful product cost information for making these decisions.
ABC is a product-costing method radically different from traditional volume-based approaches. ABC is essentially forward-looking, while traditional product costing is historically oriented. Traditional product-cost information is... [continues]
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