ACTIVITY BASED COSTING

• Activity based costing is an accounting

methodology that assigns costs to activities
rather than products or services
• This enables resource and overhead costs to
be more accurately assigned to the products
and the services that consume them
 ABC STEPS
• Identify activities and resources –the organization is
broken down into main activities which may be
meaningful in terms of cost estimation, evaluation
and control. Such as ordering of materials, quality
inspection, R&D etc
• Measure the costs of resources used to perform each
activity-cost are assigned to cost pools for each
activity on the basis of resources-cost pool is a term
used to indicate grouping of costs incurred on a
particular activity which drives them.
• Determine cost drivers and resource consumption rates-cost
driver is the factor which causes the change in costs of an
activity-main cost drivers are machine time, labour hours,
quantity handled etc
• Assign activity costs to products by multiplying the use of the
cost drivers by the resource consumption rates-
– ACTIVITY COST DRIVER RATE = TOTAL COSTS OF AN
ACTIVITY/ACTIVITY DRIVER
– THE ACTIVITY COST DRIVER RATE, THUS OBTAINED WILL BE
MULTIPLIED BY THE DIFFERENT QUANTUM OF EACH ACTIVITY THAT
EACH PRODUCT/SERVICES COST OBJECT USES OR CONSUMES