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Activity Based Costing in a Bank

In: Business and Management

Submitted By ashishtayal626
Words 1423
Pages 6
Introduction
Activity-based costing (ABC) is a methodology of costing that recognizes activities in an organization as a whole and then allocates the cost of each activity or transaction with resources to all services and products in accordance to the actual consumption by each of the cost. This model assigns more indirect costs into the direct costs when it is being compared to conventional or traditional costing.
According to CIMA (Chartered Institute of Management Accountants), ABC is a medium to approach the costing and hence monitor the activities which involves two components:
• Tracing resource consumption
• Costing final outputs
Resources are assigned and allocated to various activities, and further these activities are allocated to cost objects based on consumption estimates that are made through analysis and trend. The latter utilize cost drivers which are assigned to attach activity costs.

Aims of Model
With ABC, an organization can effectively and efficiently evaluate the cost elements of all the products, activities and services. This helps a company to make decisions which can be either:
• Recognize and eliminate those activities that are non profit making and lower down the prices of the ones that are priced high
• Or recognize and eliminate processes that are not effective and allocate processing concepts that lead to similar product at a better output

Methodology
Methodology of ABC mainly focuses on the allocation of cost in management. ABC helps to broadly divide the cost into three parts:
• Fixed Cost
• Variable Cost
• Overhead Cost
The split of cost into three categories helps to locate the cost drivers. There are some costs that are relatively easy to achieve like direct labor and materials are but some are very difficult to allocate directly like indirect costs to products. Where products use various common resources in…...

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