Essay: What is Activity Based Costing

Sample Essay

Activity based costing is the method used to allocate fixed costs to estimated rates as used for the production of each of the products. It is the best method in determining the products, which are profitable, and the ones, which are not (Kaplan & Bruns, 2007). Since at Boeing Company the fixed costs are in large amounts, they should not be allocated to a specific product or division irrespective of how well it financially performs.

This implies that with the Commercial airplanes division being the one that performs the best at Boeing cannot bear the cost of all the fixed costs. It is therefore important to ensure that the fixed costs are proportionately allocated to all the departments in the organization. With the use of the ABC method of fixed cost allocation, Boeing Company is able to make critical decisions for example measuring the improvement initiatives, outsourcing as well as pricing (Sapp, David & Steven, 2000).

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