Activity Based Costing

Activity based costing is an accounting methodology that assigns costs to activities rather than products or services When employees understand the activities they perform, they can better know the costs based on such activities. Click to edit Master subtitle style ABC allows to find out the value, need for each activity so that they can get rid of the useless activities.

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Activity Any event, action, transaction, or work sequence that causes a cost to be incurred in producing a product or providing a service.

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ABC systems addresses the following Questions:

What activities are being performed by the organisational resources? How much does it cost to perform activities? Why does the oranisation need to perform those activities? How much of each activity is required for the organisations products, services, and customers?
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Conventional Costing
Expenses

ABC Costing
Resources

Economi c Element

Activities Cost Objects

Work Performe d

Cost Objects

Product or service

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Basics of A B C

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Cost of a product is the sum of the costs of all activities required to manufacture and deliver the product. Products do not consume costs directly Money is spent on activities Activities are consumed by product/services

ABC Steps
1. Identify activities and resources 2. Measure the costs of resources used to perform each activity 3. Determine cost drivers and resource consumption rates 4. Assign activity costs to products by multiplying the use of the cost drivers consumption rate
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COSTS DRIVERS:is a factor, forces or event that determine the costs of activities. Type of Cost Drivers:Structural cost drivers Organisational cost drivers Activity costs drivers

1. 2. 3.

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Illustration 4-3

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Classification of Activities for Manufacturing Organizations:Activities are classified into various categories of the production process. Activities are classified into:1.

2.

3.

4.

these are repetitive work i.e. labour hour, machine hour, power. Batch level- are those activities which are performed each time a batch of product is produced. Ex-machine setups, inspection, production scheduling. Product level- activities are those which support the production of diff. types of product. Ex-maintenance of machine, maintaining bill of material, material handling, etc. Facility level-are those activities which are needed to sustain factorys general manufacturing process. Exfactory 4/26/12 management, maintenance and plant

Unit level-

Advantage of ABC costing: Brings accuracy Helps in reducing costs Improves managerial decisions

1. 2. 3.

Disadvantage:1. 2. 3.

Costly Problem in selecting drivers Utility is not same for all concerns

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