the development of Activity Based Management: Activity Based Costing (ABC)

ACTIVITY-BASED COSTING

I . Definition of Activity-Based Cost Accounting

A . How does activity-based costing work

The matching principle of accounting dictates that for every revenue generated , a corresponding cost should be attributed to it . In to determine the resulting profit properly , these components should be matched against each other . This has been the guiding convention of financial reporting since the practice of accounting became an integral part of the economy to evaluate properly a firm in a somewhat standardized format . Business firms , particularly , those engaged in production , adheres to the standards

promulgated by their respective accounting standard-setting bodies . However , as far as internal users are concerned for purposes of making business strategies , financial accounting is too narrow . As such , the management of a business firm can easily suspend this principle and adopt different methods of deriving cost information , as long as it would fit their specification This practice has different effects in the evaluation of the firm 's own performance

Through the years , several efforts were exerted to improve revenue and cost matching that provides relevant information for evaluation purposes , and one of these is Activity Accounting . Activity Accounting has two phases : activity-based costing (ABC ) and activity-based management (ABM . Whereas the first phase provides useful insights and feedback in improving competitiveness through effective resource management , the second one emphasizes continuous improvement of processes . ABC is defined as a costing system in which numerous overhead cost pools are allocated using one or several non-volume related factors as bases

Even though ABC...