Activity-based cost system is an accounting strategy that identifies and at the same time assigns the cost to products. Furthermore, it recognizes the relationship between costs, overhead activities and the products that are manufactured (Plank, 2018). During this time it allows circuitous costs items that less self-assertively than customary strategies. Activity-based cost system help in the allocation of financial resources, however, some such as salaries are difficult to assign using this method of cost accounting (Diavastis et al., 2016). However, it is in view of exercises, for example, setting machines for creation, appropriating completed merchandise and furthermore working machines. The diverse exercises devour overhead assets and are viewed as cost objects. Under this system, there are different categories of activity measures the duration driver and also the transaction drivers. Each has its own different role. The duration drivers measures how long an activity can take to complete while the transaction drivers count how many times an activity occurs (Plank, 2018).
Activity-based cost system has improved the costing process in different ways. One of the major ways that it has improved the process is by growing the number of cost pools that can be utilized to gather the overhead expenses, as opposed to amassing all expense in a wide pool. Secondly, it creates a base for activities that generate costs instead of the direct labor costs and machine hours. And lastly, activity-based cost system has changed several indirect costs, making costs previously considered indirect to be traceable to certain activities (Andreasen, et. al., 2017).
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Furthermore, this method has its benefits because it is motivated by a desire to understand the real cost of individual product and service more accurately. Such benefits include the improvement of the production process and efficiency, it reveals unnecessary costs that were a target for elimination and helps identify specific products that are unprofitable.
References
Andreasen, S. E., Holm, H. B., Jørgensen, M., Gromov, K., Kjærsgaard-Andersen, P., & Husted, H. (2017). Time-driven activity-based cost of fast-track total hip and knee arthroplasty. The Journal of arthroplasty, 32(6), 1747-1755.
Diavastis, I., Anagnostopoulou, E., Drogalas, G., & Karagiorgos, T. (2016). The interaction effect of accounting information systems user satisfaction and Activity-Based Costing use on hotel financial performance: Evidence from Greece. Accounting and Management Information Systems, 15(4), 757.
Plank, P. (2018). Introduction. In Price and Product-Mix Decisions Under Different Cost Systems (pp. 1-5). Springer Gabler, Wiesbaden.
