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Activity Based Costs (ABC) what is it and how does it impact profitability?

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General Management

Activity Based Costs (ABC) what is it and how does it impactprofitability?

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Activity Based Costs ABC what is it and how does it impact profitability What is activity based costs ABC Traditionally costs are the amount of money required to manufacture or produce something There are two types of costs direct costs which can be directly attributed to the product viz costs of raw material and labor The other type of costs are called indirect costs which cannot be directly a attributable to the product like rent and telephone The profitability is derived by difference between the sales price and sum total of costs The biggest drawback of traditional costing is its inability to allocate indirect costs correctly to the product As these costs are absorbed arbitrarily the actual real cost is never known and thereby profitability calculations go wrong In spite of this problem costing is still done in the traditional way because this method is widely accepted by most governments tax authorities and stock markets for valuation Activity based costs is another method of costing proposed in order to get better idea of impact of costs on    See Answer
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