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Activity based costing is the process of identifying the costs
associated with each unit of work produced. This costing model
increases the precision at which the actual of cost of delivering
a product or service can be determined by making indirect expenses
direct.
More traditional costing results in the expense of overhead being
allocated evenly over the different items being costed. Traditional
cost accounting makes it difficult to determine where the inefficiencies
in a process lie.
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By adopting activity based costing companies can more accurately
determine the real value of a product and remain competitive in
markets where competition is already high. This technique is a key
step towards improving business processes
There are 5 steps necessary to perform activity based costing:
- Analyze Activities
- Gather Costs
- Trace Costs to Activities
- Establish Output Measures
- Analyze Costs
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