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What is Activity Costing?

Activity Costing, or Activity-Based Costing (ABC), is an accounting method that identifies and assigns costs to specific activities within a business process. Unlike traditional costing methods, which allocate costs based on a single factor, such as direct labor or machine hours, activity costing allocates costs based on the activities that consume resources. This approach provides a more accurate representation of the true costs associated with producing goods or services.

Why is it important or used in Accounting?

Activity Costing is used in accounting for several reasons:

Advantages of Activity Costing:

Disadvantages of Activity Costing:

Example of Activity Costing for a Wholesaler or Retailer Business:

Consider a wholesaler that distributes electronic goods to retailers. The wholesaler’s activities include order processing, inventory management, and delivery. To implement, the wholesaler would identify the costs associated with each of these activities.

Order Processing Activity:

Inventory Management Activity:

Delivery Activity:

By associating costs with specific activities and allocating them based on relevant factors, the wholesaler can gain insights into the true costs of each activity. This information can be used to assess the profitability of different product lines, improve operational efficiency, and make informed decisions about resource allocation.