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Introduction to Activity Based Costing - Activity Based Costing, Cost Management Video Lecture | Cost Management - B Com
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FAQs on Introduction to Activity Based Costing - Activity Based Costing, Cost Management Video Lecture - Cost Management - B Com
| 1. What is activity-based costing (ABC)? |  |
Ans. Activity-based costing (ABC) is a cost management technique that assigns costs to specific activities within an organization based on their consumption of resources. It aims to provide a more accurate and detailed understanding of the costs associated with each activity, allowing for better decision-making and cost control.
| 2. How does activity-based costing differ from traditional costing methods? | |
Ans. Activity-based costing differs from traditional costing methods by focusing on activities and their consumption of resources, rather than using broad cost allocation methods. Traditional costing methods often allocate costs based on volume metrics such as direct labor hours or machine hours, whereas ABC allocates costs based on the specific activities that drive those costs.
| 3. What are the benefits of implementing activity-based costing? | |
Ans. Implementing activity-based costing can provide several benefits, including:
- Improved cost accuracy: ABC provides a more accurate representation of costs by linking them directly to activities and the resources consumed by those activities.
- Enhanced decision-making: With a better understanding of costs, managers can make more informed decisions regarding pricing, product mix, resource allocation, and process improvements.
- Cost control: ABC allows for better identification and management of cost drivers, enabling organizations to identify and eliminate unnecessary activities, reduce costs, and improve efficiency.
| 4. What are some challenges or limitations of using activity-based costing? | |
Ans. While activity-based costing offers advantages, it also presents certain challenges and limitations, such as:
- Data collection: Implementing ABC requires gathering detailed data on activities and their resource consumption, which can be time-consuming and costly.
- Subjectivity: Assigning costs to activities may involve subjective judgment, particularly when estimating resource usage or determining cost drivers.
- Complexity: ABC can be complex to implement and maintain, especially in organizations with numerous activities and cost drivers.
- Resistance to change: Implementing ABC may face resistance from employees accustomed to traditional costing methods.
| 5. In what types of industries or organizations is activity-based costing commonly used? | |
Ans. Activity-based costing is commonly used in industries or organizations where there is a high degree of overhead costs, diverse product lines, or complex production processes. It is particularly beneficial in manufacturing, healthcare, service industries, and organizations with significant overhead or indirect costs. By accurately allocating costs, ABC helps these industries make more informed decisions and improve cost management.
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Nov 26, 2024 Last updated |
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