What are the four steps in Activity Based Costing?
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What are the four steps in Activity Based Costing?
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Solution Summary
It is of paramount importance that during cost assignment that the costs are properly categorized. Particularly in the case of indirect costs, which sometimes can be difficult to quantify, and in many cases where there is more than one output, even more difficult to determine.
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In its concept paper, "Activity-Based Costing (ABC) - Accounting for Operational Readiness," the United States Department of Defense (DOD) defines the four steps to activity-based costing as being:
1. Identifying activities.
Conduct an in-depth analysis of the operating processes of a task area. Each process may consist of one or more activities required by outputs
2. Assign resource costs to activities.
Also referred to as "tracing," assigning costs to cost objects determines why costs were incurred. Costs can be categorized in three ways:
? Direct - costs that can be traced directly to one output. An example would be the material costs (wood, paint, varnish) to build a chair.
? Indirect - ...
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