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Choose Essay For All professional tutors and get the best quality activity-based accounting assignment help solutions. Activity-based accounting is also known as activity-based costing. It is a type of accounting that assigns indirect and overhead costs to related services and products.
The uniqueness of the technique is based on how it identifies the relationship between manufactured products, overhead activities, and expenses while assigning indirect costs to products. Most business owners are challenged to ensure accurate pricing of goods and services.
They need help to come up with the right price to attract customers in a way that will depict the presented value while avoiding the chances of overpricing. Besides, the other challenge is accountability for overheads and indirect costs. Activity-based accounting has the solution of helping business owners, and managers overcome the challenge. For any professional guidance, seek our activity-based accounting assignment help online.
General overview of activity-based accounting
Generally, activity-based accounting is the systematic, cause-and-effect approach used in assigning the cost of activities to customers, products or services, or any cost subject. The technique thrives on the principle that products consume activities.
It serves as the best tool that refines a costing system that offers a better measurement of non-uniformity in the use of overhead resources of an organization for services, products, and jobs. This technique integrates different activities’ essential and critical roles in its costing system while focusing on individual activities as the primary cost objects.
Activity-based costing is different from traditional costing. Get more details from our activity-based accounting assignment help notes.
Steps involved in activity-based accounting based
Based on Essay For All tutors, there are five main steps involved in activity-based accounting, which are outlined below;
Identify costly activities involved in the production process.
The process’s first step is crucial based on how it highlights all the activities involved in making products. Not all activities can be costly. However, some can demand more capital to ensure the process is successful and complete. Interacting with different personnel at diverse organizational levels is vital to get their views about the involved activities. Activity-based accountants going through the process face the challenge of grouping those activities that affect the overhead costs.
Allocate overhead costs to the activities identified in the first step.
From the initial step, if any overhead cost was identified associated with the outlined activities, it is vital to create a relationship. Each activity must therefore have its overhead cost hence forming a cost pool.
In this case, the overhead costs of the purchasing materials activity will encompass depreciation of purchasing office equipment, rent for purchasing department office space, and salaries for purchasing personnel. The main objective of the second step is identifying the most critical and costly activities needed in the production of products.
Identify the cost driver for each activity.
According to our activity-based accounting assignment help tutors, a cost driver is any action that results in costs associated with the activity. There are various things to do to identify cost drivers.
For instance, collecting information from relevant sources and interviewing key personnel in different organizational departments such as accounting, quality control, production, and purchasing. A company should establish the cost drivers after a careful process analysis for each of the identified activities.
Calculation of a predetermined overhead rate for each activity
The formula in this step is dividing the estimated overhead costs by the approximated level of cost driver activity.
Allocation of overhead costs to products
In this case, the formula used is the multiplication of the predetermined overhead rate for each activity by the cost driver activity level used by the product.
Motivations behind the development of the activity-based accounting system
Activity-based accounting systems emerged to replace the traditional absorption costing system, which had various weaknesses. First, there has been a growing tendency towards product diversification to secure economies of scope. Increasing market share also needs assurance of more accurate product costs based on a fast-changing cost structure.
In this case, the activity-based accounting system was more appropriate. Another motivation for the relevance of the costing system was the ever-increasing and stiff market competition resulting from globalization. It caused the need for more accurate product costs to overcome the drawbacks associated with over-costing and under-costing.
Do you know that the rapid development of automated products resulted in the growth of overhead costs? Also, activity-based costing became of increased relevance. For deeper insights, ask for our activity-based accounting assignment writing services.
Benefits of activity-based accounting
Promotes better resource allocation
Based on Essay For All experts, activity base accounting enhances the visibility of hidden indirect costs like utilities and depreciation. In this case, the business can determine the final costs of its products. In the process, it supports the improved ability of business organizations to make informed decisions.
Enhance pricing decisions
Activity-based costing procedures enable a business organization to understand the cost of producing a product. Since the firm should make profits, awareness of the incurred expenses helps make pricing decisions that will not overprice the people but price effectively to make profits and also offer value for money. More information concerning the production cost may result in more assumptions that continue in pricing decisions. The risk of assumptions, in this case, is making losses.
Identify cost-saving areas
Once a business knows the costs involved in the production process, it can identify those profitable and less profitable ventures. Some business operations can demand fewer inputs but result in high yields. Such experiences are worth the company’s investment. Activity-based accounting, therefore, helps, in this case, to identify and concentrate on cost-saving areas.
Offer accurate and realistic costs.
Cost pools are inseparable from activity-based accounting processes. Classifying overheads into different cost pools helps to make the process offer more significant insights into cost drivers. The existence of the pools enables businesses to have an improved reflection of the actual costs incurred in product production.
Levels of activity-based accounting
Operation
Generally, the operation at the unit level measures the expenses of all direct operations. As a result, it examines pertinent issues like direct material, direct labor, system repair, etc. It focuses on activities that happen in each unit. However, it is also worth noting that these activities occur when a product is produced, or a service is discharged.
The batch level
The second level of operation in a cost-based accounting system is the activities at the batch level. Accordingly, this level measures the cost of a group or batch-related work. For instance, it examines order purchases, quality tests, system setup, etc. They are primarily used in production companies and focus on the costs incurred whenever a batch of specific products is produced.
The activity of the product line
The activity line of the product level is another dimension of a cost-based accounting system. This level focuses on the expenses of the technical improvements made on all product lines, assembly lines, product design, warehousing, and storage. The approach assists in assigning overhead and indirect costs.
For instance, it measures salaries and utilities for products and services. As a result, these activities support an entire product line and not necessarily a single product unit. Other examples of the activities of the product line include the engineering changes made to a product line, product design changes, and warehousing and storage costs for each product line. Hence, the activities covered at this level are essential and pivotal in understanding cost accounting.
The facility support activity level
The facility support activity is the final level of operation in a cost-based accounting system. So, this level encompasses various processes involving the expense of administrative actions. For example, it entails property tax, protection plans, building depreciation, maintenance costs, etc.
Activity-based accounting assignment help
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