Steps involved in ABC

The following steps are followed to determine the cost of product through ABC method:
I. Examination of costing system prevailing in the organisation. First of all, existing costing
system should be evaluated, whether it is capable of adopting ABC technique or not? If yes,
then proceed to the next step.
II. II. Determining activities. All those activities which are involved in the production are
identified and analyzed. For example: activities related to machines, labour, material,
packaging, dispatching, etc. Cooper and Kalpan categorized activities on the basis of levels. i.
Unit-level activities / Primary activities. Activities which are directly related to the volume of
production fall into this category. For example: Inspection, Material, etc.
III. ii. Batch-level activities / Support activities. These are activities which support primary
activities and their costs are determined by number of batches of final products. For example:
Machine set ups, order of materials, etc.
IV. iii. Product-level activities. These activities are related to product and their costs are
determined by addition of new product lines and their maintenance. For example: Designing
of products, advertisement of particular product, etc.
V. iv. Facility-level activities. These activities are related to various facilities such as
maintenance of land and building instead of specific products. For example: Security of
factory, salary of manager, etc.
VI. III. Determining of cost basis. Average cost or past cost can be used as cost basis. IV.
Determining of cost pools and assigning cost. For each activity, cost pools/centres are to be
determined at this step and cost of resources consumed by each activity during production
will be allocated to these cost pools. For example: Total costs of materi

2. Realistic cost. Determines the realistic cost of manufacturing for relevant products. 3. Better allocation
of overheads. Through ABC, it becomes possible to allocate overheads properly on the basis of number of
activities performed for a specific product. 4. Decision making. It helps management in making right
decision at right time by providing relevant, accurate and reliable costs information timely. 5.
Unnecessary costs. Identifies inefficient processes which have wasted and unnecessary costs and aimed to
improve them
2. Realistic cost. Determines the realistic cost of manufacturing for relevant products. 3. Better allocation
of overheads. Through ABC, it becomes possible to allocate overheads properly on the basis of number of
activities performed for a specific product. 4. Decision making. It helps management in making right
decision at right time by providing relevant, accurate and reliable costs information timely. 5.
Unnecessary costs. Identifies inefficient processes which have wasted and unnecessary costs and aimed to
improve them
2. Realistic cost. Determines the realistic cost of manufacturing for relevant products. 3. Better allocation
of overheads. Through ABC, it becomes possible to allocate overheads properly on the basis of number of
activities performed for a specific product. 4. Decision making. It helps management in making right
decision at right time by providing relevant, accurate and reliable costs information timely. 5.
Unnecessary costs. Identifies inefficient processes which have wasted and unnecessary costs and aimed to
improve themSteps involved in ABC The following steps are followed to determine the cost of product
through ABC method: I. Examination of costing system prevailing in the organisation. First of all,
existing costing system should be evaluated, whether it is capable of adopting ABC technique or not? If
yes, then proceed to the next step. II. Determining activities. All those activities which are involved in the
production are identified and analyzed. For example: activities related to machines, labour, material,
packaging, dispatching, etc. Cooper and Kalpan categorized activities on the basis of levels. i. Unit-level
activities / Primary activities. Activities which are directly related to the volume of production fall into
this category. For example: Inspection, Material, etc. ii. Batch-level activities / Support activities. These
are activities which support primary activities and their costs are determined by number of batches of
final products. For example: Machine set ups, order of materials, etc. iii. Product-level activities. These
activities are related to product and their costs are determined by addition of new product lines and their
maintenance. For example: Designing of products, advertisement of particular product, etc. iv. Facility-
level activities. These activities are related to various facilities such as maintenance of land and building
instead of specific products. For example: Security of factory, salary of manager, etc. III. Determining of
cost basis. Average cost or past cost can be used as cost basis. IV. Determining of cost pools and
assigning cost. For each activity, cost pools/centres are to be determined at this step and cost of resources
consumed by each activity during production will be allocated to these cost pools. For example: Total
costs of materials