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Activity-based costing assigns manufacturing costs to specific sources rather than equally attributing costs to various sources. Activity-based management is influenced by information derived from activity-based costing, which can be used to manage the manufacturing process for increased profitability.
Activity-based costing refers to a method for attributing manufacturing costs to the correct source rather than a general attribution of costs equally to various sources during the manufacturing process. The relationship between activity-based costing and activity-based management stems from the fact that activity-based management can be influenced by information derived during analysis of the activity-based costing process. To properly understand the link between activity-based costing and activity-based management, it is necessary to understand what the two accounting terms mean.
Typically, when manufacturers attempt to attribute the cost of production to the various items in the manufacturers’ product line, they do so by looking at the volume of the production process for that particular item without considering other factors that may cause this statistic is inaccurate. For example, the production cost calculation for product A and product B by the same company can be used to illustrate the concepts of activity-based costing and activity-based management. Assuming that the manufacturer already knows the directly attributable costs resulting from the manufacture of product A and product B, but is still trying to calculate the overhead costs for the production of the two items, this process will require the application of costing based on activities in order to reach the correct conclusion, as such overhead costs can be misleading without proper analysis. In this case, the overhead costs for the production of both product A and product B might involve overhead costs such as inspection of raw materials prior to production and the use of a predetermined number of employees as part of the production process.
When the manufacturing process for product A uses less input from factory workers due to the nature of the product, even if the workers are available for the production process, this will serve as a factor in the activity-based costing calculation. . If product B uses all hands in the factory during the production process, even if the volume of products produced is less than the volume of product A produced, this will also be reflected in the activity-based costing calculation as a factor taxpayer, making product B more expensive. The connection between activity-based costing and activity-based management is related to how such information can be used to better manage the manufacturing process for increased profitability.
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