UNIT-3

ACTIVITY BASED COSTING ( ABC)

SYSTEMS
The traditional costing system uses actual departments
or costcentres for accumulating & redistributing/
allocating costs. The ABC system , instead of using
Cost centres , uses activities for accumulating costs

The focus shifts from what the money

was being spent on ( e.g- labour, equipment , supplies &
so on ) to what the resources required by the spending
were actually doing.
ACTIVITY BASED COSTING /MANAGEMENT (ABC
/ABM) SYSTEM-The ABC system is a system based on
Activities linking spending on resources to the products/
Services produced /delivered to customers.

The basic idea of ABC is that costs are grouped

accordingly to what drives ( causes ) them to be
incurred. These cost drivers are used as the absorption
base. Cost drivers are defined as those activities /
Transactions that are significant determinant of cost. In
other words , the cost drivers is an activity that
generates
Cost.
COST ALLOCATION- The ABC system uses a two-stage
approach , similar to but more general than traditional
cost system-

1)Tracing cost to activities-the first step in cost allocation

under the ABC system is to identify major
activities that cause overhead costs to be incurred.
some the activities are related to production volume
but others are not.The cost of resources consumed
performing these activities are grouped into cost
pools.
Common Activities & associated costs/ cost drivers
major Associated Cost drivers
activities costs
Processing purchase Labour costs for Number of purchased
orders for materials & workers order purchased
parts Determining order
quantities ,contacting
Vendors & preparing p.o
Handling material & Labour costs for workers Number of material
parts Handling material & requisition
partts, depreciation
Producing goods using Depreciation on Number of machine-
Manufacturing manufacturing hours
equipment equipment
Supervising assembly Salary of assembly Number of assembly
workers supervision labour hours
Inspection of finished Labour cost for finished Number of inspection
goods goods inspection

Packing customer order Labour cost for packing Number of boxes

workers,cost of P.M packed