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Activity Based Costing Cost Accounting and Its Importance

The management accounting has one of the most important conducive parts known as the cost accounting. Cost accounting determines the actual budget of the organization and the overall costs that are incurred in the entire operations of the company. It is a well known fact that without the knowledge of the investment that is being made on the production of products as well as providing services, it would be very much difficult for the company to survive in the tough market conditions. Cost accounting is a part of the management accounting and thus is not at all answerable to any of the accounting bodies and does not have to adhere to any of the guidelines as set by the accounting bodies like GAAP. There are many ways of doing the cost accounting. One such method is that of the activity based cost accounting.

The activity based costing cost accounting identifies the various activities in the company and then assigns the cost of each activity resource to all the products as well as services on the basis of the actual consumption for each. It is one of the most important tools that are used to understand the products and customer cost along with the profitability. The activity based costing cost accounting is primarily used to support strategic decisions like the pricing, outsourcing, as well as the identification and the measurement of the process.

Some of the methodologies that are used in the activity based costing cost accounting are:

  1. Cost allocation
  2. Variable cost
  3. Fixed cost
  4. Cost driver and the
  5. cost driver rate

Some of the uses of the activity based costing cost accounting are:

  1. One of the important uses of this method is that it can help in the identification of the inefficient products, activities as well as departments
  2. It assists in finding the unnecessary costs
  3. The company can determinedly allocate more resources on the entities that are profitable
  4. With it the costs can be controlled at an individual as well as on a departmental level.
Even though the activity based costing cost accounting has tremendous advantages over the older methods of cost accounting, yet it is not devoid of some glaring shortcomings like it cannot assign the overhead costs like the salary of the CEO to the products as well as customers.