Activity-Based Costing System and Traditional Systems Term Paper

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Activity-Based Costing and Traditional Systems

Activity-based costing (ABC) measures the cost of a product/service based on the activities performed to produce the product/service. Activities are processes, functions, or tasks that occur over time and have recognized results. Activities use up assigned resources to produce products and services. An ABC system first allocates indirect and support expenses to activities and processes and then to products, services and customers. Therefore, the ABC system can provide a better understanding of operations and service to improve customer profitability, product profitability and process efficiency than traditional cost measurements that focus only on costs consumed by products.

There are many examples of the benefits of ABC. An information technology company can use ABC to understand the cost of serving an individual customer to determine the profitability of that customer.

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And, a company might want to use ABC to determine the cost of the product based on the activities that goes into it. Knowing the accurate cost of a product may enhance a company's ability to position products, facilitate the most appropriate product mix for the market, and bargain with the customer. ABC may also allow employees to understand costs across business functions as shown in Figure 1. Staff can then more easily identify the value added and non-value added activities and eliminate the later to achieve a greater level of efficiency. For example,….....

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