Activity based costing is utilized by manufacturing companies that assist them in determining product profitability. How can ABC be used to track customer profitability and is it important to determine this by customer? What type of activities would you suggest that could be tracked by customer?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Activity based costing is utilized by manufacturing companies that assist them in determining product profitability. How can ABC be used to track customer profitability and is it important to determine this by customer? What type of activities would you suggest that could be tracked by customer?
Machine setups, maintenance requests, power consumption, purchase orders, quality checks, and production orders are a few examples of cost drivers.
There are two categories of activity measures:
- Transaction drivers entail keeping track of how frequently an activity happens.
- Duration drivers, time how long it takes an activity to finish.
The premise of activity-based costing is that costs are incurred as a result of activities and that the purposes of the activities are products, services, and clients. Instead of just allocating what has already been spent, ABC concentrates on figuring out what costs arise. Understanding each client's needs and costs, as well as how they affect corporate profitability, can help determine the level of customer service that will be advantageous to both the client and the company. ABC uses resource drivers and activity drivers based on cause and effect to trace costs to activities in the production process
- Direct labour expenses, direct materials costs, and other direct costs can be linked back to specific items.
- All other expenditures are classified as indirect costs and are arbitrarily assigned to different items based on factors like product volume or direct labour hours.
- As long as indirect expenses and product diversity are kept to a minimum, this costing technique can function effectively. Accurately allocating overhead costs gets more challenging when the product mix diversifies..
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