What is Activity-Based Costing? Why is it needed?
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Activity-based costing is a methodology that uses what is generally considered to be a more logical approach to assigning overhead costs to your products or services. The Chartered Institute of Management Accountants (CIMA) defines activity-based costing as:
“An approach to the costing and monitoring of activities, which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs”.
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Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing.
Why is it needed?.........
Activity-based costing differs from the more traditional methods of costing in that it assigns the costs to the activities that are actually the cause of those overhead costs. ... Calculating the costs of each activity. Applying those costs to products, based on their usage of those activities.
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