Discussion Assignment

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Unit 2 Discussion Assignment

Briefly, describe the five (5) steps used to implement activity-based costing (ABC). What are the advantages of using ABC? State some disadvantages.

The five steps to implement activity-based costing (ABC) to allocate manufacturing overhead costs to each activity are: Identify costly activities required to complete products, assign overhead costs to the activities identified, identify the cost driver for each activity, calculate a predetermined overhead rate for each activity, and allocate overhead costs to products. As mentioned previously, the cost pools are organized by activities rather than by departments or plant-wide.

The first step to ABC is to identify costly activities required to complete products. It is imperative …show more content…
For example, a car manufacturing company may select activities that have the greatest impact on overhead costs such as purchasing materials, setting up machinery, assembling products, and inspecting finished products (Heisinger & Hoyle, 2012, page. 139). Step two to implementing ABC is to assign costs to the activities identified in step 1. The costs assigned are to those activities that have the biggest impact on the overhead cost (Heisinger & Hoyle, 2012, page. 139). If the activities identified are too many the ABC system would be unmanageable, and if it is too few it will be irrelevant to determine the overhead costs. For example, some of the costs associated with purchasing material activity would be salaries for the procurement department, office space, and depreciation of office equipment. The third step is to identify the cost driver for each activity (Heisinger & Hoyle, 2012, page. 140). A cost driver is determined by interviewing key personnel in the purchasing, production quality control, and accounting areas. Step four is to calculate a predetermined overhead rate for each activity. We calculate the overhead rate dividing the estimated overhead costs by the
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