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As a result, a cost driver is an aspect or an event that origins a change in the total cost of the object. Overhead costs are incurred because of these actions. Determining Each Major Activity’s Cost Driver – The activities that determine the cost are known as cost drivers.For example, the whole cost of placing orders could be categorized under ordering costs. It simply refers to the distribution and allocation of various expenditures to a specific activity or group of activities. Establishing Cost Pool/Cost Centres for Each Significant Activityz – A cost pool is a collection of total costs for every major activity.A cost-benefit analysis can be performed to determine the worthiness of any endeavor. Identifying the Activities – The number of production activities varies from product to product and from organization to organization.5 Necessary Steps Involved in Activity-based Costing

This strategy provides a clearer view of where a firm’s money is flowing and can help the company cut costs or price its goods more appropriately. It is easy to tell which products are genuinely profitable because ABC provides detailed production cost breakdowns.

Manufacturing companies with large overhead costs tend to use activity-based costing to gain a better view of where their money is going. It distributes overhead costs into different production-related activities.ĪBC is a procedure that applies overhead allocation to the products that utilize those activities, allowing it to be more exact than traditional allocation.ĪBC works effectively in complex processes where there isn’t a single cost driver driving the expenses. Activity-based costing is a process for computing production costs.