Activity Based Costing and Absorption Costing

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Activity Based Costing (ABC) and Absorption Costing Activity Based Costing Overview Activity based costing (ABC) is one of the newer costing methods that has been developed to work in conjunction with more traditional systems. ABC is not a comprehensive system that can be used alone rather a new way to apply overhead and support costs to individual product lines. This method will look at a business unit or process and designate various cost drivers. The cost drivers can be organized in many different ways and are entirely dependent on the process. For example, if products use different amounts of electrical wire then the electrical wire could possibly be constructed as a cost driver. As opposed to indirect overhead being allocated to all products equally, the products might include overhead calculations depending on the amount of electrical wire that is used in the products. The cost drivers can be considered any activity that incurs costs. The ABC method attempts to allocate costs based on the activities involved in production. By contrast, other systems generally consider the finished product as the only cost driver. Therefore, this approach has been often introduced in Just in Time (JIT) systems, LEAN production systems, Six Sigma, and other newer manufacturing systems. By allocating the costs to the activity, accounting can more closely mirror the production ideologies that are in play in such systems. Differences in ABC vs. Absorption In the absorption
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