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Implementing activity based costingYou will find implementing Activity Based Costing a powerful tool in measuring performance.Activity-based costing is used to identify, describe, assign costs to, and report on agency operations.Traditional accounting is not as accurate for use as a cost management system.Activity based costing identifies opportunities to improve the business process and efficiency by determining the `true' cost of a product or service. You can use activity based costing to focus management attention on the total cost to produce a product and to determine the basis for full cost recovery.You will find that support services are well suited for activity based resourcing because they produce measurable units of output.
For example, if make or produce 50 houses for a total cost of $12,500,000, then the cost-per-unit (house) is $250,000. When you make a clear connection between the costs and outputs you have a true financial picture.You will see the costs are move visible and explicit which will help you make good decisions when allocating resources. Total cost visibility takes into account all of the costs associated with producing or delivering a product.For example, if you have a family member working in your business and you pay them by providing them a vehicle.Your family member's labor is not free and you must calculate the cost of the vehicle into your total costs. You have four steps in activity based costing:
Activity drivers assign costs to outputs based on the outputs' use of resources. For example, a driver may be the number of times an activity is performed (transaction driver) or the length of time an activity is performed (duration driver). Activity based costing encourages managers to identify which activities are add value.Those activities that will best accomplish a mission, deliver a service, or meet a customer demand. Activity based costing improves efficiency and improves the decision making process by focusing on the actual costs. |
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