Briefly describe in layman's terms what is meant by activity based costing.
How would it apply at a Port Authority?
Activity Based Costing (ABC) is a method used to allocate costs to different activities or tasks within an organization. It helps to determine the actual cost of each activity by considering the resources required and the amount of time spent on each activity.
In the context of a Port Authority, which manages various activities related to port operations, ABC can be used to accurately assess and allocate costs to specific activities. For example, a Port Authority may have activities such as cargo handling, maintenance of port infrastructure, security, administrative tasks, etc.
To apply ABC, the Port Authority would need to first identify the different activities performed and the resources consumed by each activity. They would then determine the cost drivers, which are factors that influence the costs of these activities. For instance, in cargo handling, the cost driver could be the number of containers handled.
After identifying the cost drivers, the Port Authority would measure the quantity of each cost driver for every activity. This data can then be used to calculate the cost per unit of the cost driver, providing a more accurate way to allocate costs to different activities.
By using activity based costing, the Port Authority can gain insights into the actual costs associated with each activity. This information can help in cost control, decision-making, and improving efficiency by identifying activities that may be consuming excessive resources or are not generating sufficient revenue.