Definition of Activity-Based Cost Accounting

The matching ruler of accounting dictates that for every revenue generated, a corresponding cost should be attributed to it. In order to determine the resulting pro primed(p) properly, these compvirtuosonts should be matched against each other.This has been the point convention of financial reporting since the practice of accounting became an integral post of the economy to evaluate properly a firm in a somewhat standardized format.Business firms, particularly, those engaged in production, adheres to the standards promulgated by their single accounting standard-setting bodies. However, as far as internal users are relate for purposes of making business strategies, financial accounting is too narrow.As such, the management of a business firm can easily suspend this principle and select different methods of deriving cost information, as long as it would fit their specification. This practice has different effects in the evaluation of the firms own performance.Through the years, s everal efforts were exerted to improve revenue and cost matching that provides applicable information for evaluation purposes, and one of these is Activity Accounting. Activity Accounting has devil phases activity-based costing (ABC) and activity-based management (ABM).Whereas the first phase provides usable insights and feedback in modify competitiveness through effective resource management, the second one emphasizes constant improvement of processes. ABC is defined as a costing arrangement in which numerous overhead cost pools are allocated using one or several non-volume related factors as bases.Even though ABC also traces direct materials and direct labor the same way as TCA, it traces substantiating costs, not on the number of output, but on the activities involved in the production process. As such, ABC is considered a more detailed and useful cost-tracing tool.To illustrate, assume a company producing two distinct products, Product A and Product B, has accumulated ma nufacturing overhead cost amounting to $1,000,000.00. Assume further that it would reside two direct labor hours (DLH) to produce Product A and tailfin DLH for Product B, and total DLH for the whole period is 5,000.At the end of the period, there were ergocalciferol social units of Product A and 1,000 units of Product B. Finally, assume that direct cost per unit for Product A is $250.00 while that of Product B is $350.00.