Competitors emerge and the basis for competition evolves to other areas such as cycle time, quality, or reliability. As an industry becomes mature, the basis of competition typically moves to price. Companies begin focusing on cost reduction.
This costing system is used in target costing, product costing, product line profitability analysis, customer profitability analysis, and service pricing.
It is also hugely popular since organizations can develop a much better corporate focus and strategy if costs are better grasped. Definition of Activities in ABC System The ABC system of cost accounting is based on activities, which is any event, unit of work, or task with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines.
Activities consume overhead resources and are considered cost objects. Under the ABC system, an activity can also be considered as any transaction or event that is a cost driver.
A cost driver, also known as an activity driver, is used to refer to an allocation base.
Examples of cost drivers include machine setups, maintenance requests, power consumed, purchase orders, quality inspections, or production orders.
There are two categories of activity measures: These levels include batch-level activity, unit-level activity, customer-level activity, organization-sustaining activity, and product-level activity. First, it expands the number of cost pools that can be used to assemble overhead costs.
Instead of accumulating all costs in one company-wide pool, it pools costs by activity.
It also creates new bases for assigning overhead costs to items such that costs are allocated based on the activities that generate costs instead of on volume measures, such as machine hours or direct labor costs. Finally, ABC alters the nature of several indirect costs, making costs previously considered indirect- such as depreciationinspection, or power- traceable to certain activities.
Alternatively, ABC transfers overhead costs from high-volume products to low-volume products, raising the unit cost of low-volume products.Definition.
Target costing is defined as "a disciplined process for determining and achieving a full-stream cost at which a proposed product with specified functionality, performance, and quality must be produced in order to generate the desired profitability at the product’s anticipated selling price over a specified period of time in the future.".
Activity Based Costing in the Information Age. January 1, By James Tarr, CPIM. I. Traditional costing today. Despite the fact that it is over 75 years old, most companies still use standard cost systems both to value inventory for financial statement purposes and for many other management purposes as well.
Inbound Logistics' glossary of transportation, logistics, supply chain, and international trade terms can help you navigate through confusion and get to the meaning behind industry jargon. Practical, easy-to-follow ABC guidelines for small and mid-sizedbusinesses Incorporating activity-based costing (ABC) concepts into yourbusiness without relying on the usual complex ABC jargon can be adaunting task-even for the most experienced accountant.
Standard Costing and Variance Analysis Topic Gateway Series 3.
Standard Costing and Variance Analysis. Definition and concept. Standard cost 'The planned unit cost of the product, component or service produced in a. A Precedence Diagramming Method (PDM), which is sometimes also known as the Activity on Node (AON) Diagramming Method, is a graphical representation technique, which shows the inter-dependencies among various project activities.
This diagramming method is used to draw the project schedule network diagrams – for example the Critical Path Network Diagram and the Critical Chain .