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. ...
C/A= HD+ M + E + S
Where C/A = estimate cost of each activity
H = Number of labor hours used in creating a product (in case of McDonalds it can be a burger)
D = Prevailing Wage Rate of Employees
M = Material Cost of the product (In case of McDonalds, it can be a cost of Burger)
E = Equipment Cost (It can be cost of deep-fryer)
S = Sub-Costs to perform the Activity)
Activity-Based Costing or ABC costing is an ideal method of apportion from McDonalds because costs can divided between the number of units sold. In simple word the output of employees and costs of material is measurable. For e-g if each worker produces 4 burgers in an hour and takes a salary of $4/hr, we can easily come to the amount that will be apportion to a single unit. In this case this amount will be 4/4= $1 labor cost/ each burger. Similarly, other costs like cost of electricity can be calculated by dividing it with the number of items sold. Suppose that McDonald think that its main business is burger. Now it allocates 70% of its total electricity bill to burgers. The amount of bill, for example, in a certain month is $280. It will allocate $196 to burger. Now, it will look at the number of burgers sold this particular month. Let's suppose that 196 burgers are sold, now it will allocate 196/196= $1 electricity overhead to each burger and will use this data in unit cost calculation. These were some of the examples. In the very same way McDonalds will calculate and apportion the costs of each product on the basis of activity. This is how McDonald can use ABC costing to