(Questions that will assist in quantifying the relationship between resources and activities include: How much time is spent performing each activity? What equipment is used to perform activities? Do some activities have dedicated equipment? Do some activities require more space than others?) After the data on resources have been collected, establish cause-and-effect relationships between resources and activities or resources and cost objects. The third step in the process is

ABC can identify high overhead costs per unit and find ways to reduce the costs, avoid decreases in head counts due to inaccurate allocation of costs, and measure profitability with higher accuracy than traditional costing that uses direct-labor hours as the only cost driver (Activity-based costing, n.d.). Bibliography Activity-based costing (ABC). (n.d.). Retrieved Apr 2, 2009, from Managers-Net: http://www.managers-net.com/activityBC.html Activity-based costing (ABC): What is it and how can reengineering teams use it?

But the customized product probably takes much more design and engineering time than the mass-produced product. Traditional costing systems would not, in most cases, pick up this difference. With traditional costing a company that makes both low and high volume products might spread all of its overhead to products it manufactures based solely on machine hours. This might misallocate overheads between products. And if one product demands a significant amount

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

General & Administrative-costs cannot reasonably be associated with any particular product or service produced (overhead). These costs would remain the same no matter what output the activity produced. An example would be salaries of personnel in purchasing department, depreciation on equipment, and plant security. In the next step the results of analyzing activities and the gathered organizational inputs and costs are brought together, which produces the total input cost for

Activity-Based Costing in a Service-Based Organization Activity-Based Costing operates on the conventional approach and applies a two-stage allocation instruction and other cost drivers. First, the system identifies the important activities and overhead costs assigned to each activity in proportion to the resources used. Consequently, for each of these cost pools, cost drivers are identified. Secondly, the assumed overhead cost driver is assigned proportionally to the final outputs of the cost