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Activity-based costing is a more specific way of allocating overhead costs based on “activities” that actually contribute to overhead costs. In job-order costing and variance analysis, overhead costs are applied based on a specific cost driver such as labor hours or machine hours.
The number and level of competitors have changed significantly over time. Consequently, many organizations have experienced declining margins year after year, making efficient cost control extremely important.
In this context, implementing the ABC costing methodology enhances cost control, leading to increased competitiveness and improved profit projections
The cost of implementation and measurement has significantly decreased due to the advancement and widespread accessibility of information technology. In the past, implementing an effective ABC costing system was prohibitively expensive and feasible only for companies with access to large applications running exclusively on mainframes and large computers.
Unlike traditional costing systems, activity-based costing centers on the organization’s processes and activities. It also provides special attention to often overlooked aspects in companies, such as the cost of different customers, channels, markets, and regions – essential for making accurate decisions.
In the beginning, costs from each activity are tracked within the company. Then, these costs are allocated and analyzed to determine how each activity impacts the final costs, enabling a precise assignment of expenses.
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