ACTIVIT Y B A S ED

COSTING G
AGEM ENT ACC O UNT IN
GROUP FIVE MAN
ACTIVITY BASED COSTING
• It is a method of assigning indirect and overhead costs to each products or services produced
according to the actual consumption by each.

• It assigns costs to the activities that are the real cause of the overhead.
• The ABC system assigns costs to each activity that goes into production
• it then assigns the cost of those activities only to the products that are actually demanding the
activities.

• ABC gives specific production cost breakdowns and not just assigning an umbrella average
• It is an improvement on the convectional costing approach
CONVECTIONAL COSTING
• It is a cost system that uses only unit/volume based cost drivers to apply overhead costs to
products and services.

• The overhead rate gets applied on the basis of a cost driver, such as number of labor hours
required to make a product.

• Traditional costing is best used when the overhead of a company is low compared to the direct
costs of production.
ACTIVITY BASED COSTING
• Manufacturing organizations need ABC for product costing where:
• production overheads are high in relation to direct costs.
• there is great diversity in the product range.
• products use very different amounts of the overhead resource.
• consumption of overhead resources is not primarily driven by volume.
• To overcome the inherent limitations of traditional absorption costing and use of blanket overhead
• rates.