Activity Based Costing
Introduction
Activity Based Costing (ABC) is a methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each.
By using ABC to assign the overhead costs to each activity, the following steps should be followed:
1. Identify and define activities using interviews and surveys. Then build a list of activities.
• Activity name-usually consists of an action verb and an object.
• A description of the tasks that make up the activity.
• Classification as a primary activity or secondary activity.
• Activity driver- a measure of activity output. For example:
Overhead Activity Activity Drivers
Inspection Inspection hours
Maintenance Maintenance hours
2. Assign costs to activities. Determine the cost of resources consumed by each activity:
• If the resource is exclusive to the activity, use direct tracing.
• If the resource is shared by several activities, use drivers to trace and measure the consumption of resources by each activity.
• The costs of secondary activities are ultimately assigned to primary activities using activity drivers.
3. Assign costs to products. After the cost of primary activities is calculated, assign the cost of these activities to products based on usage of the activity as measured by activity driver. Coat assigned to products are calculated as follows:
Cost assigned to product= Predetermined activity rate × Actual usage of activity
The differences of ABC and Volume Based Costing
Key differences between ABC and Volume Based Costing:
ABC use cause –and –effect relationships to assign overhead cost. Volume Base Costing uses unit –based drivers such as direct labour hours, which often have nothing to do with the actual overhead resources consumed by a product. The ABC uses the different rate to assign the related overhead cost. The Volume Base Costing uses the sign rate (e.g. plantwide rate) to assign all
Activity Based Costing (ABC) is a methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each.
By using ABC to assign the overhead costs to each activity, the following steps should be followed:
1. Identify and define activities using interviews and surveys. Then build a list of activities.
• Activity name-usually consists of an action verb and an object.
• A description of the tasks that make up the activity.
• Classification as a primary activity or secondary activity.
• Activity driver- a measure of activity output. For example:
Overhead Activity Activity Drivers
Inspection Inspection hours
Maintenance Maintenance hours
2. Assign costs to activities. Determine the cost of resources consumed by each activity:
• If the resource is exclusive to the activity, use direct tracing.
• If the resource is shared by several activities, use drivers to trace and measure the consumption of resources by each activity.
• The costs of secondary activities are ultimately assigned to primary activities using activity drivers.
3. Assign costs to products. After the cost of primary activities is calculated, assign the cost of these activities to products based on usage of the activity as measured by activity driver. Coat assigned to products are calculated as follows:
Cost assigned to product= Predetermined activity rate × Actual usage of activity
The differences of ABC and Volume Based Costing
Key differences between ABC and Volume Based Costing:
ABC use cause –and –effect relationships to assign overhead cost. Volume Base Costing uses unit –based drivers such as direct labour hours, which often have nothing to do with the actual overhead resources consumed by a product. The ABC uses the different rate to assign the related overhead cost. The Volume Base Costing uses the sign rate (e.g. plantwide rate) to assign all