ACTIVITY BASED COSTING

by shashank shekhar

Basics of ABC
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

Conventional Costing

AB Costing Resources

Economic Element

Expenses

Activities Cost Objects

Work Performed

Cost Objects

Product or service

Continued..
ABC assigns Costs to Products by tracing expenses to activities. Each Product is charged based on the extent to which it used an activity It recognizes that many organizational resources are required not for physical production of units of product but to provide a broad array of support activities.

Whats What of abc ?

The activity is the work that is done. The resource is what the activity uses to do the work. The cost of the activity depends on the quantity of resources used to accomplish the activity. The cost driver for an activity is the factor that influences the amount of the resources that will be consumed by this activity. The activity driver measures how much of the activity is used by the cost object. The cost object is whatever it is you wish to cost. It could be a product, service, process, job or customer.

Step 1: Identify Resources

Step 2: Identify Activities

STEPS INVOLVED IN ABC

Step 3: Identify Cost Objects

Step 4: Determine Resource Drivers

Step 5: Determine Cost Drivers

 Step 1: Identify Resources

Resources represent the expenditures of an organization. Examples include production labor, sales and marketing labor, occupancy and utilities, equipment, and supplies. ABC links these costs to products, customers, or services.

Step 2: Identify Activities

Activities represent the work performed in an organization. By determining the actual activities that occur in various departments, such as accounting, customer service, and sales, it is then possible to more accurately relate these costs to customers, products, and services.

Step 3: Identify Cost Objects

ABC provides profitability by one or more cost object, usually represented by products, customers, and/or services. Cost Object profitability is utilized to identify money losing customers, to validate separate divisions or business units, or to measure the performance of individual projects, jobs, or contracts.

 Step 4: Determine Resource Drivers

Resource Drivers provide the link between the expenditures of an organization and the Activities performed within the organization. For example, the total salary of a customer service representative would likely be allocated to the Activities performed based on the amount of time spent performing the Activity.

Step 5: Determine Cost Drivers

Determination of Cost Drivers completes the last stage of the model. Cost Drivers trace, or link, the cost of performing certain Activities to Cost Objects. One part of the Ace Trucking's business operation involves making deliveries by truck. The activity is delivering goods. The costs of this activity include the truck drivers wages, fuel, depreciation of the truck, insurance, etc. The quantity of the resources that will be consumed by this activity are influenced by the number of deliveries made per year. Hence the cost driver could be the number of deliveries.

Summarizing an ABC Model

Identify Resources Identify Activities Identify Cost Objects

Define Activity Drivers

Define Resource Drivers

Enter Resource Costs

Enter Resource Driver Qty.

Enter Activity Driver Qty.

Calculate Costs