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Horngren'S Financial And Managerial Accounting
Found in: Page 1063

Short Answer

How can ABM be used by service companies?

Service companies perform different activities to deliver services. The cost determination based on those activities and making decisions on that basis is the application of ABM by service companies.

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Step by Step Solution

Activity-Based Management (ABM)

Activity-based management is a management system that uses activity-based costing to make decisions for making profits and satisfying customers. An activity can be any task, operation, or procedure.

Activity-based costing uses activities as a base to determine the cost of the product.

The activity-based management keeps the records of the primary activities of the business, determines the cost of those activities, and then uses that information to make decisions.

ABM used by service companies

A service company conducts various activities to deliver services to the customers. Each service provided may be a group of activities by service companies. Services companies allocate the indirect cost in the same manner as the manufacturing company. In order to determine the cost using activity following four steps are followed –

1) To identify activities and estimate their total cost

2) Identifying the allocation base for each activity

3) To compute the predetermined overhead allocation rate for each activity

4) Allocate the indirect costs

Based on the cost allocation, decisions are made to charge per customer, and cost-cutting ways are looked for.

The activities used by service companies may be different based on the nature of the business.

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