Category Archives: 2.04 Activity Based Costing (ABC)

Treatment of materials in production

Materials in production are what the finished product consists of. Materials and time spent on putting them together. In production you use two types of materials – those that the product mostly consists of and side materials to help you to put the product together, i.e. glue, screws and so on. When we talk about ‘treatment of materials used in production’ in accounting terms, we talk about the usage of materials and their cost.  Continue reading

Activity based costing – costs per unit

As we have already discussed, activity based costing lets you measure the expenses certain process generates. This in turn helps in assessing either any alternative is necessary in terms of materials, methods or entire procedure. It also helps in determining the sales price for end or byproduct.

Although you may have the expenses measured in total, say on maintenance we used before 10,000 EUR, it still needs to be split onto measurable units. Now this part is way trickier than collecting all related expenses together. In order to do this, you need to follow the next steps.
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Basics of activity based costing (ABC)

Something like activity based costing or ABC comes into the scene when we are talking about some sort of production activity. Production essentially is a composition of procedures, which use materials, services etc to produce the end result, which normally are sellable goods. As such the company purchases materials, buys services, develops internal expenses (personnel, asset related depreciation etc) which usually are designated to their cost center on the income statement.

Although cost centers are essentially required to measure company’s performance in different departments, to help keeping costs on certain level and so on, it does not show you if certain procedure could be done more efficiently.
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Cost centers on the income statement

In a small company there is usually an admin team comprising of one accountant, assistant and manager, a sales team and perhaps a production and logistics team. While the last two are considerable in larger companies, it shows that within one company there may be numerous departments.

Although those departments vary depending on the business type and market sector, some of those are more or less described as cost centers and others profit centers. As the name suggests, cost centers are generating cost and profit centers generate revenue. Since they are within one company, profit centers take care of the revenue streams and cost centers are there to provide support for profit centers by making the products, organizing logistics, advertising, maintenance etc.
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