Activity-Based Costing and AIS
Activity-Based Costing (ABC) is an accounting method that identifies the activities a company carries out and then assigns indirect costs (overhead) to products.
Activity-based costing shows the relationships between the activities, the costs, and the products, and correctly associates the lion's share of the resources used with the actual production or provision of services.
The recognition of these relationships enables the indirect costs to be assigned to products in a more rational, less arbitrary manner than traditional methods that would allocate a broad percentage of costs to products without any true measure of the accuracy of the approach.
By using activity-based costing, a company can treat more indirect costs as direct costs. This is important because some products or services consume more indirect costs than do other products or services.
In effect, the activity-based costing enables an accountant to trace the resource consumption and costs, which are mapped to the final outputs of a business. The mapping occurs in this manner:
Resources are assigned to activities.
Activities are assigned to cost objects based on estimates of the consumption.
Cost drivers are used to associate the activity costs of the outputs.
In his book, Management Challenges of the 21st Century, Peter Drucker clarified the primary distinction between activity-based accounting and traditional cost accounting. Thinking about indirect costs as a pool from which each activity draws a certain amount, it is apparent that traditional cost accounting hones in on the cost of actually doing something -- some definable activity. But activity-based accounting also shows the cost of not doing anything, for instance when production is held up and workers are just waiting around because a vendor has not provided a necessary part. Because of this capability, activity-based accounting is a definite improvement over traditional accounting.
Accounting Information System (AIS)
An accounting information system...
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