Accounting All-in-One For Dummies

Chapter 2

Performing Activity-Based Costing

In This Chapter

Understanding peanut butter costing

Designing and implementing an activity-based costing system

Using activity-based costing to increase profits in the budgeting process

As a business owner or manager, you can always use more useful information — information that helps you make informed decisions. Chapter 1 introduces two widely used costing methods: job costing and process costing. Now dig deeper for better information on costs. Pull apart your product or service and find out more about the activities that create cost. The result is an activity-based costing system.

With activity-based costing (ABC) you incur costs when production and sales happen. When you take an order over the phone, manufacture a product, or place a box on a delivery truck, the activities generate costs. The activity becomes the focus to assign costs. Because you're connecting cost to the activity that creates the cost, your cost per product is more accurate, and so is your pricing.

Avoiding the Slippery Slope of Peanut Butter Costing

Despite the benefits of ABC costing, many business managers use cost smoothing, or peanut butter costing, instead, ...