Activity based costing is one of the modern approaches that have been developed to apportion various indirect costs to a unit of production or process. These indirect costs are known as "Overheads" in the business terminology. These are also known as indirect costs because they cannot be associated with a particular production process and the entire organization has to bear these costs.
Talking about McDonalds as part of our report, the overheads that McDonald restaurants incur are telephone bill, security costs, electricity bill and wages. Since, these costs cannot be absorbed in the direct costs of a food item, they are treated as overheads.1
Like many other organizations McDonalds also faces problems in apportioning these costs to the different units of products. ABC costing or Activity based costing is an ideal estimate of these costs that can be used by McDonalds to get rid of the problem.
By using the ABC costing McDonalds will first calculate the entire data about these indirect costs or overheads. ...