Activity-based costing or ABC costing is a method to calculate the product or any service. We are calculate based on overhead and indirect cost. In ABC costing, we are calculating all types of expenses.
Activity = Cost
In this paragraph, Activity-based costing is a way to calculate what is our product rate and how we are going to decide our product rate.
Firstly, we are thinking about it what is our production rate, in the traditional way we decide my production rate is equal to how much our cost is divided by how much product is made. Still, it is not possible because many products take less row marital it’s all thought about it.
Secondly, we are not decided by-product or service rate by their raw material and human resources. We are choosing our product rate by executing all our overhead and all indirect cost, then we are deciding but how we are decided.
Thirdly, we have to decide how much all over are expense and how much workforce is consumed by the product or service.
Finally, we are getting the price of our product or service. It all drives the cost, cost drive mines we are going to make a reasonable product rate and going to make the right product and make then analysis in a better way is called cost drive and after we are getting the final result is called ABC.
What’s in it
What is the Traditional way of costing?
Traditional way costing is also a method to identify the estimated price of your product or service.
If we are wanted a quick rate of product or service, Then we use the traditional way of costing but want to describe all product prices and accuracy, then we have to activity-based requiring.
Therefore, It directly depends on the direct price.
The formula of Traditional way costing: –
Formula
The average rate of the product = Total price of Products / Total no of Products
Example: –
Let’s discuss this costing via some questions?
Question: –
For instance, We are making some product like “simple phone” and “pro phone” We want to know how much cost will be spared in this both phone
Machine Maintenance Cost = $400
Machine Running = 10000
Quality control cost = $600
Quality Inspection = $1000
Total No of Simple Phone = 7000
Total No of Pro Phone = 3000
Answer: –
Then we are going to calculate via the Traditional way.
Machin Maintenance cost = $400
One Phone rate = 1,000,000 / 10,000 phones = $100 for each phone (simple or pro both rates are same)
How to use activity-based costing and How we can Apply is your Business?
Activity-based costing or ABC costing is going to calculate all type of resources and all type of, cost, so we are going to calculate this is a very inefficiency way to decide our price below: –
T is the same above question are Given you can learn how it is work and how to use then you can apply in your business I explain via one question: –
Question: –
We are making some product like “simple phone” and “pro phone” then we want to know how much cost will be spared in this both phone
Machine Maintenance Cost = $400
Machine Running = 10000
Quality control cost = $600
Quality Inspection = $1000
Total No of Simple Phone = 7000
Total No of Pro Phone = 3000
Answer: –
The machine uses in Simple and Pro Phone
Machine Maintenance Cost = $400,000
Machine Hours = 10,000
$400,000 / 10,000 = $40 for one machine hours
Simple Phones Maintenance cost and Hours use by making this phone
4500 Machine Hours use
then
4500 x $40 =$180,000 (10,000 Machine Hours = $40 for 1 machine hour)
Pro Phone Machine Minutemen cost and Hours use by making this phone
5500 Machine Hours
5500 x $40 = $220,000 (Machine Maintech Cost $400,000
Quality Control Cost
Quality control cost = $6000,000 (10,000 M
Inspection = 1000
$600,000 / 1,000 = $600 for one inspection
Simple Phone quality control cost
350 Quality Inspection
350 x $600 = $210,000
1,000 Quality Inspection $600 for 1 inspection
Pro Phone quality control cost
650 Quality Inspections
650 x $600 = $390,000
Quality Control Cost $600,000
Final Prize of Simple and Pro Phones:
Machine Manteca cost for all Simple phone = $ 180,000
Number of Simple phones made = 7,000
Machine maintenance cost for each Simple phone
$180,000 / 7,000 phone = $25.71 for each Simple phone
Quality control cost for all Simple phones = $210,000
Number of Simple phones made = 7,000
Quality control cost for each Simple phone
$210,000 / 7,000 phones = $30 for each Simple phone
Total Overhead Cost for each Simple phone
$25.71 + $30 = $55.71 each pro phone.
Machine Maintenance cost for all pro phone = $220,000
Number of pro phones made = 3,000
Machine Maintenance cost for each pro phone
$220,000 / 3,000 phone = $73.33 for each pro phone
Quality control cost for all pro phones = 390,000
Number of pro phones made = 3,000
Quality control cost for each pro phone
$390.000 / 3,000 phones = $130 for each pro phone
Total Overhead Cost for each pro phone
$73.33 + $130 = $203.33 each pro phone.
Activity-based costing steps by steps: –
I am going to describe Activity-based costing in a step by step process: –
First, we search for all the related essential things use in our products and take the rate.
Then, we are calculating all related prices and are expenses in our making the products and how we have overcome the appraisal price and also define the overhead cost.
Next, each cost drive to assigned to a specific driver, then it drives all assign programs and other costs labour, rate, and we can think of other salutation.
Then each cost driver drives their products
Lastly, we all apperception per, form then we are calculating all how many hours and how many materials and how many raw marital are consumed, and all are multiply by the cost driver.
Then you are got the rate of your products and then You can see the above Example for more understanding.
Difference between Activity-based costing and Traditional way of coasting:
You can see in the above all question difference between Traditional based costing way and activity-based costing, The there substantial big difference:
I Traditional way we can see all phone price is $100 but, in the activity, based costing or ABC costing you can see Simple phone price is $5,5.71, and Pro phone price is $203.33 for each phone.
That is all difference between Traditional based Costing and Activity-based costing
Note: – If we are wanted to estimate what is our product and service price then we consider the Traditional is way costing, but we are want to know the act amount price of the product or ser, vice then we have to consider the ABC system.
Application
1. Better Management of the prize.
2. Overhead cost.
3. Budgeting.
4. Calculate costs more accurately.
5. Performance measure.
6. Fixing the price of the Product or service.
7. Management.
8. Managing cost.
9. Incentives by creating cost consciousness among employees.
10. Calculate the cost more accurately.
Advantage of Activity-based costing
- That helps to understand the behaviour of overhead costs.
- It links profitability analysis and operational decisions.
- This improves the competitive pastime of a business.
- helps to identify inefficient product deployments and activities.
- It helps to identify unnecessary costs.
- That provides information for the measurement of performance.
- It identifies the product department’s actinides
- control costs for each product for each department.
- unnecessary costs as cost drives for each activity give better control over the factor that costumer costs.
Conclusion: –
In this above all, a blog we understand how to fix the rate of price and how to calculate, and we are going to take the average of the products or service rate.
Firstly, we are learning how to calculate the price Traditionally, and the activity-based way this is all defined. In addition, we understand how to get instant price rates and how to get more accurately are of our service.
Secondly, we are learning how to implement this service in our business and how we are calculating more accurately rate/price/prize for our service or products in our company.
Thirdly, we understand where we use and what is the application of this ABC technique, and we also define the advantage of this service.
Finally, we are found the best price for our products or service for our business relations.
Also Read: Emotional Intelligence- Developing Strong “People Skills”