Activity based Costing( ABC)

Definition: Activity based costing is a managerial accounting method that traces overhead costs to activities and then assigns them to objects. In other words, it’s a way to allocate indirect, overhead costs to products or departments that generate these costs in the production process.

What Does Activity Based Costing Mean?

What is the definition of activity-based costing? ABC costing focuses on identifying activities, or production processes, that are used to process a job. These individual activities are grouped together with similar processes into a cost pool that relates to single activity driver

The cost pools are then analyzed and assigned a predetermined overhead rate that will eventually be assigned to individual jobs and products.

As you can see, this is a multi-step process, but activity-based costing is a much more accurate way of assigning indirect costs. It’s difficult to determine how much electricity or heat one department or job uses over another without some type of methodical allocation process.

2 10, Net 30

Definition: 2 10, Net 30 is a cash discount term where customers have 30 days to pay for a purchase but can receive a two percent discount if the entire purchase paid in full within ten days.

What Does 2/10, Net 30 Mean?

What is the definition of 2/10, net 30 credit terms? This is the cash discount terms for a credit transaction. 2/10 represents a 2 percent discount when payment is made to the supplier within 10 days of the credit sale. N30 or Net 30 represents the other option to pay the amount due in full within 30 days. The goal of 2/10 is to encourage early payment for credit sales.

A consistent credit turnover is difficult to maintain in business. Sales managers and individual vendors prefer giving some form of discount to encourage their customers to pay early rather than have the entire amount stuck in collections. This is particularly important because suppliers have to pay for the inventory up front often times before they make a sale to the customer. Thus, the supplier is out of the money used to pay for the inventory and out of the inventory that was sold to the customer. Suppliers need to keep a consistent flow of cash in order to reorder stock or production materials and pay for other operating expenses.