Chapter 2
Costing by the ABCs
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 information that helps you make informed decisions. Book 7, Chapter 1 introduces two widely used costing methods: job costing and process costing. In this chapter, you’ll dig deeper for better information on costs, pulling apart your product or service and finding out more about the activities that create cost. The result is an activity-based costing system.
In this chapter we'll discuss activity-based costing (ABC), in which 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, that activity generates 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, ...
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