Assignment 1: Cost, Volume, Profit AnalysisBy the due date assigned, respond to the following in the Discussion Area below:Continuing the scenario from the Module 3 discussion:Identify and classify th

Concepts of Activity Based Costing (ABC)

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Application of ABC in Service Sector

Activity based costing (ABC) is applicable to all types of businesses including those in the service sector like Little Angels Daycare Center that will offer child care services. The focus is to determine and lower the cost to serve. Labor cost of personnel remains the most significant cost for Little Angels that I would compare to manufacturing costs (Chea, 2011). I would allocate them as indirect costs that include professional labor costs that occur when services are being offered.

The ABC method would give a more realistic picture of division costs incurred to produce revenue. It would give accurate estimates of indirect costs such as professional labor costs that affect revenue produced. It is significantly important to control and manage indirect costs effectively to minimize production costs. Some expenses that affect final cost of services are preventable or can be reduced (Stefano & Filho, 2013).

I would learn that costing accurately is essential to make long-term strategic decisions and daily operating decisions. It is vital to make accurate costs for service pricing, resource allocation and staffing decisions among others. Since direct materials are not a major category cost in the service firm, the organization can focus on identifying and emphasizing on profitable services. For instance, it can focus on offering child care services for infants who tend to pay higher fee compared to other young children because they require more care.

Chea, A. C. (2011). Activity-Based Costing System in the Service Sector. International Journal

of Business and Management, 6(11): 3-7.

Stefano, N. M., & Filho, N. C. (2013). Activity-based costing in services. Springer Plus, 2: 80.