Concepts of Activity Based Costing

Cost accounting is very important for any organization as it covers processes of recording, allocating and classifying the expenditures for identifying the cost of products or services for the sake of presentation of the required accounting information to the higher authority or to the management. The major areas that are dealt with within the cost accounting are products, job order, and processes among others. Previously scope of cost accounting was limited to the manufacturing unit, but now with the formulation and enhancement of the improved and advanced procedures, cost accounting has also been adopted by the service industries. It denotes the emergence of cost accounting in the businesses. Considering this fact, it has been intended to highlight the methods of costing.&nbsp.

Before critically analyzing, the two concepts in terms of its comparison and contrast, it is important to develop the basic knowledge regarding both the concepts. The activity-based costing method is comparatively newer to the industry. Hence, it has been intended to emphasize the concept to concrete the base of the discussion.

ABC is an economic model and determines the activity centers or cost pools in an organization. It allocates cost to the cost drivers that have been based upon the number of each activity adopted. The activities that generate cost need to be determined and matched to the level of drivers while using activity-based costing. Though the cost drivers are linked with the activities, those can occur in the different phases. The unit-level drivers assume the&nbsp.enhancement of the inputs for every produced unit. Secondly, the batch level drivers assume the ‘variation of the inputs’ in every produced batch. Product level drivers presume the importance of the inputs to backup the production of different categories of the product. Finally, facility-level drivers are associated with the manufacturing process of the facility.