ABC

Activity-based costing(ABC)isacosting methodologythat

identifiesactivitiesinanorganizationandassignsthecostof
eachactivity withresourcestoallproductsandservices
accordingtotheactualconsumptionbyeach....Thelatter
utilizecostdriverstoattachactivity coststooutputs
CostDrivers
Costofanyproductdependsuponcostdrivers.There
maybedifferenttypesofcostdriverssuchasnumberof
unitsortypesofproductsrequiredtoproduce.Ifthereis
anychangeincostdriver,thecostofproductchanges
automatically.
Activity Based Costing
Activity-BasedCosting(ABC)isacosting
modelthatidentifiesactivitiesinan
organizationandallocatestheindirect
resourcestoeachactivityforcompletionof
theproductionofgoodsandservices
thevariouselementsofcostandhowtheyare
classified.
DirectorIndirectMaterials
Thematerialsdirectlycontributedtoaproductandthose
easilyidentifiableinthefinishedproductarecalleddirect
materials. For example, paper in books, wood in
furniture, plastic in water tank, and leather in shoes are
directmaterials.Theyarealsoknownashigh-valueitems.
Otherlowercostitemsorsupportingmaterialusedinthe
production of any finished product are called indirect
material.Forexample,nailsinshoesorfurniture.
DirectLabor
Anywagespaidto workers or a group of workerswhich
may directly co-relate to any specific activity of
production, supervision, maintenance, transportation of
material,orproduct,anddirectlyassociateinconversion
ofrawmaterialintofinishedgoodsarecalleddirectlabor.
Wages paid to trainee or apprentices does not comes
undercategoryofdirectlaborastheyhavenosignificant
value.
Someexamplesofindirectcostsandtheirdriversare:

Maintenance costs are indirect costs and the possible

driver of this cost may be the number of machine hours,
Handling raw-material cost is another indirect cost that
may be driven by the number of orders received,
Inspection costs that are driven by the number of
inspections or the hours of inspection or production runs.
Overheads
Indirectexpensesarecalledoverheads,whichinclude
materialandlabor.Overheadsareclassifiedas:
Productionormanufacturingoverheads
Administrativeexpenses
SellingExpenses
Distributionexpenses
Researchanddevelopmentexpenses
ThebasisofActivityBasedCostingis

Identifytheactivitiesrequiredtoproducethecostofthe
productorservice.
Allocatetheresourcesoneachactivity
Establishthecostdriversoneachactivityandcountits
numbers,
Determinethecostpercostdrivers,
Determinetheamountofactivityrequiredforeach
productandservice
Determinetherealcostforasingleproductorservices.
example
Definition

ActivityBasedcostingisAmethodofmeasuringthecost
andperformanceofactivitiesandcostobjects.Assigns
costtoactivitiesbasedontheiruseofresourcesand
assignscosttocostobjectsbasedontheiruseof
activities.ABCrecognizesthecausalrelationshipofcost
driverstoactivities.