Answer
Step1:
Activity-based costing is the process of assigning costs to users of overhead based on the activities performed. An activity is a task, operation, or procedure that creates costs that are incurred.
Step2:
Activity-based costing isn't necessarily confined to manufacturing companies. It can be used in service industries as well. All activity-based costing is trying to do is to reduce and control costs. Service industries have costs that need to be controlled and reduced just like their manufacturing company counterparts. Service industries have profit centers that use more resources such as utilities and supplies.
Work Step by Step
Being able to identify the activities that create these costs makes it easy to assign cost directly to them instead of based on an arbitrary calculation.
Step2:
The use of activity-based costing can be routinely applied to these centers to determine which ones use more of the resources so that overhead costs can be allocated more accurately.
