Activity-Based

Costing
Activity Based Costing
Volume-based allocation Activity-based
methods work best if the By allocating overhead
manufacturing costs on the basis of
environment includes activities that lead to
mostly unit-level costs the overhead costs, this
OR the costs that vary method is effective in
with the volume of automated, diverse
production product environments.
Cost Levels
ABC allocates overhead costs on the
basis of activities that drive costs. To do
this, it is important to understand the
level at which costs are incurred.

Unit-LEVEL Product- Batch-LEVEL Facility-LEVEL

COSTS LEVEL COSTS COSTS COSTS
Summary of Costs Levels
Unit-LEVEL COSTS
Incurred each time a unit is
produced. Examples:
• Supplies for factory
Batch-LEVEL COSTS
Incurred for batches of
goods produced. Examples:
•Salaries & Wages

Product-LEVEL COSTS
Facility-LEVEL COSTS
Incurred for each type of
Incurred to provide
product produced.
general facility processes.
•Salaries of engineers
Examples:
•Product development
•Insurance and taxes
costs
 Assigning Overhead
Costs Under ABC

Stage 1: • Overhead costs can be

Identification of traced to more than one
activity.
Activities

Stage 2: • Once the activities are

Identification identified, each is analyzed
of Cost Drivers to find what best drives
the cost of the activity.
Activities and Cost Drivers
ABC in Service Environments
ABC is every bit as
important for service
providers as it is for
manufacturing
companies.

It has gained widespread

acceptance in the service sector (i.e.,
Banking service, Postal Service.
Insurance, Software
Benefits of ABC
Cost
Accur
acy
Increa
Betterses
Control
Through Identification
of Costs

Better Day-To-Day Decision Making and

Opportunities for Continuous
Improvement
Limitations of ABC

High
Measur
ement
Costs
Time Consuming
with Multiple Activity
Pools and Cost Drivers
If the market dictates prices, ABC
implementation costs may exceed the
expected benefits of more accurate
data.
Who Benefits from ABC?

Cost Non-Unit-
Distortions Level Costs

????
Companies
Benefiting
From ABC
Diverse, Higher % of
Complex Overhead
Products
ABC Costing Calculation
• A Construction company is planning to build 2,3 and 1 bedroom flats. It has
estimated following cost scheduled. You are required to estimate the cost for
each type of flat.
Per Unit
Particulars 2-Bedroom 3- Bedroom 1-Bedroom
Unit 75 100 25
Direct Materials (Rs) 16,50,250 22,75,500 6,15,750
Direct Labour (Rs) 8,25,250 11,50,750 4,75,250

Activity Cost Drivers 2-Bedroom 3- Bedroom 1-Bedroom

Purchasing Number of Orders 45 55 15
Inspection Number of Inspections 20 30 10
Supervision Hours of Supervision 85 90 15
Delivery Days 2 4 1

Overhead Cost Matrix

Activity Estimated Cost
Purchasing 1,75,50,750
Inspection 3,75,75,500
Supervision 5,25,50,100
Delivery 9,75,25,250
Total Overhead 20,52,01,600