Chapter 10, Problem 1RQ

How are activity-based costing and activity-based management similar? How do they differ?

To determine

Explain the manner in which activity-based costing and activity-based management are similar and different.

Explanation of Solution

Activity-based costing (ABC):

Activity-based costing refers to the method of costing where the overhead cost is assigned to various products. This costing method identifies the relationship between the manufacturing overhead costs and the activities. This relationship is then used to allocate indirect costs to the products.

Activity-based management (ABM):

Activity-based management is the process of identification of the strength and weakness of the activity and determining where there is a need for improving the cost efficiency of the activities.

The similarities between activity-based costing and activity-based management are briefly explained below:

Activity-based costing and activity-based management are both used for determining the activity based processes of production. Activity-based costing focuses on identifying the cost and activity relationship of the process whereas activity-based management identifies the strength and weaknesses of the activities.

The difference between activity-based costing and activity-based management are as follows:

Activity-based costing focuses on using the costing information of activity-based costing to make a better decision, but activity-based management is more focused on identifying the ways to make the activities more efficient in the organization.