Activity Based Costing Example in 6 Easy Steps – Managerial Accounting with ABC Costing

Accounting

With loads of businesses looking to save money by outsourcing accounting services to qualified individuals, certified public accountants can make a solid income.

Starting a CPA business from home requires relatively low overhead, but it may take a time to land the clients needed to turn a profit. You can market your services through networking, and you might consider starting your business part time until it gets off the ground.

While you can be an accountant without CPA certification, CPAs have a strong advantage over their noncertified peers. Visit the American Institute of CPAs website for information on specific state requirements.

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Imagine your brand makes two types of mobile phone devices. They are each produced working with one machine. The maintenance cost of the apparatus is $100 a month. What percentage should each style of telephone share under the maintenance cost? In order to be "just", some will suggest that the cost must be divided 50%-50%.

However, what if Phone A consumes 90 hours of the machinery, and Phone B uses only 10 hours of the apparatus? Should the cost remain to be split 50%-50%? As part of classic "allocated" costing, the cost should probably still be split 50%-50%.

However applying the principle of Activity Based Costing, it needs to most likely be cut up 90%-10% for the reason that one phone type is based on 90 hours of the apparatus monthly while the other cell phone form typically only consumes 10 hours of the identical device. The foregoing technique makes use of "amount of activity" for being a function of costing, and not just "allocation" where accountants simplistically allot the costs by the same token.Needless to say, for any product or service, there are a lot more activities to consider, and not only the employment of a particular device. These varying activities which generally encounter a mark on cost are classified as "cost drivers".

Cost drivers may appear in numerous varieties for instance machine hours consumed, number of inspections, hours spent on inspections, number of production runs, quantity of hours used up throughout production, quantity of setups, together with multiple others.In the case above, we simply used machine hours consumed. Inside a less forgiving example, we may additionally need to consider the number of inspections.

Suppose Phone A solicited added inspections by enterprise engineers than Phone B? It goes without saying, a great deal more of the compensation of institution engineers really needs to be allocated to Phone A. Whereas, what if Phone B solicited a great deal more production runs than Phone A? Again, we would struggle to conveniently partition broad production costs among the two mobile phone types. To further complicate the problem, what if Phone A, irrespective of using far less production runs, solicited more production setups than Phone B?

Evidently, the difficulty of appropriately allocating costs to each of the phone models can get incredibly exhausting. Having said that, this difficulty can be really worth the effort if it helps a business apply extra meticulous or more defined costs on items, which can be made use to help the company in its pricing methods. The beauty of Activity Based Costing is that it considers all these diverse costs and cost drivers in a timely fashion, granting an organization the competence to perform pretty defined costing inspite of such concerns.

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34 Comments

  1. nasir nas says

    Cool! But why you name mba bullshit??

    1. MBAbullshitDotCom says

      +nasir nas why not? :p

  2. Tounarouza says

    Thanks Duddy it really helps me. big Up 

    1. MBAbullshitDotCom says

      +Tounarouza LOL who you calling a duddy!!? You’re welcome :p

  3. farhankotli1 says

    where was this video hiding b4? explained beautifully 🙂

    1. MBAbullshitDotCom says

      +farhankotli1 glad you found me now!

  4. Javier Del Carpio López says

    Thank you for sharing this usefull tutorials videos for MBA students 😀

    1. MBAbullshitDotCom says

      +Javier Del Carpio López  Happy to share this!

  5. nathanahtan96 says

    What do you do if a cost driver is measured as a percentage?

    1. hahahehehz says

      Add all the overheads and then times it by the percentage

  6. 50young603 says

    MBABullshit. Why the hell not? If you find the name offensive then do come in.
    Good stuff

    1. MBAbullshitDotCom says

      +50young603 :p

  7. Kate G says

    Simplified explanation of ABC resource consumption model!

    1. MBAbullshitDotCom says

      +Kate G glad you find it simplified!

  8. DASCA says

    Very Simple explanation.Easy to understand.
    MBABS is great.

    1. MBAbullshitDotCom says

      +DASCA MBABS thanks you!

  9. Eden Bunagan says

    this helped.

    1. MBAbullshitDotCom says

      +Eden Bunagan glad it helped!

  10. zubair moosa says

    how you can allocate service charges for common drivers

  11. Travel & Tours says

    yeah really gud thnx

    1. MBAbullshitDotCom says

      +SUMIT VAID really thankss!

  12. Oscar x says

    Your videos rule g

    1. MBAbullshitDotCom says

      +O.G x thanks!

  13. Sophear Khiev says

    excellent teacher, thx sir

  14. nico ani says

    Your the best man! Helped alot

    1. MBAbullshitDotCom says

      glad it helped!

  15. sharan kaur says

    Can u tell me names of companies that use AbC

  16. トライリンガール泉 says

    Thank you. I can finish vachelor of accounting because of you.

    1. MBAbullshitDotCom says

      good luck in your bachelor!

  17. Jessica Surya says

    i’m on going to make my thesis about ABC, but i’m forgot about this
    material. i try to search on youtube, saw this channel aand i’ve just
    got it. Thankyou MBAbullshitdotcom, you already helped me 😀 So easy to
    understand it rather than listening to my lecturer hahaha

  18. Bestill Findrest says

    cost and management accounting Exams on Monday! thankful for uploading ,makes it easier to understand within a short time.

    1. MBAbullshitDotCom says

      hope it helped in your exams!

  19. pooja pant says

    probably the best lecture i heard… just glad i found it
    .will help me a lot for my mcom 2nd yr papers… thnks a lot for dis… ????

    1. MBAbullshitDotCom says

      good luck in your 2nd year!

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