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Activity Costing

Activity-based costing is a totally different way of thinking.

Traditional costing techniques are now rapidly being replaced by activity-based cost accounting. Traditional costing builds cost from the bottom up—labor, material, and overhead. It concentrates primarily on manufacturing-related costs, the so-called inventoriable costs. Activity-based costing starts from the end and asks, “Which activities and related costs are used in carrying out the complete value chain of activities associated with the cost object?” Activity-based costing includes the cost of quality and service.

By designing quality into products and services during the design stage, design costs may increase, but warranty and service costs are likely to decrease, thus overcoming any cost increase experienced at the front-end of the chain. And unlike traditional costing, it includes all costs of producing a product or service.

ACTION POINT: Activity-based costing is a totally different way of thinking, especially for accountants whose financial reports do not require activity costs. Tackle this issue with your accounting staff.

Management Challenges for the 21st Century
From Data to Information Literacy (Corpedia Online Program)

* Source: The Daily Drucker by Peter F. Drucker

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