Activity Based Costing & ABM for Non- Accounting managers | Finance Cert & Exam Prep Online Course by Udemy

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Know the management accountant’s jargon – Understand how activity based costing & ABManage helps managers control costs

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Activity Based Costing & ABM for Non- Accounting managers

What Is Activity-Based Costing (ABC)?Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services. This accounting method of costing recognizes the relationship between costs, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods. However, some indirect costs, such as management and office staff salaries, are difficult to assign to a product. Activity-based management focuses on managing activities to reduce costs and improve customer value. Operational ABM is about doing things right, using ABC information to improve efficiency. Those activities which add value to the product can be identified and improved. Activities that don’t add value need to be reduced to cut costs without reducing product value. Strategic ABM is about doing the right things, using ABC information to decide which products to develop and which activities to use. This can also be used for customer profitability analysis, identifying which customers are the most profitable and focusing on them more. One of the key benefits for the use of ABM is how it enables managers to understand product and customer profitability, the cost business processes and how to improve them. How Activity-Based Costing (ABC) WorksActivity-based costing (ABC) is mostly used in the manufacturing industry since it enhances the reliability of cost data, hence producing nearly true costs and better classifying the costs incurred by the company during its production process. KEY TAKEAWAYSActivity-based costing (ABC) is a method of assigning overhead and indirect costssuch as salaries and utilitiesto products and services. The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal. An activity is a cost driver, such as purchase orders or machine setups. The cost driver rate, which is the cost pool total divided by cost driver, is used to calculate the amount of overhead and indirect costs related to a particular activity. ABC is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy.

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