Activity based costing (ABC) is an accounting methodology that assigns costs to activities rather than products and services. ABC focuses on activities as fundamental cost objects and uses the costs of these activities to compile the costs of other objects. It contributes costs to cost units based on the benefits received from indirect activities like ordering and quality assurance. ABC facilitates strategic cost management by showing how activities consume resources and how products or customers trigger activities, assigning costs according to resource consumption. ABC also describes firms as series of activities designed to satisfy customer needs, providing information to managers to improve activities. The benefits of ABC include understanding overhead cost behavior and relationships, allocating resources to value-adding activities, linking profitability analysis to operations, ensuring visibility of non-
2. Activity Based Costing
•
Activity Based Costing is an Accounting
methodology that assigns costs to activities
rather than product and services.
•
ABC is a system that focuses on activities as
fundamental cost objects and utilizes cost of
these activities as building blocks or compiling
the costs of other cost objects.
3. Contd…….
“Cost contribution to cost units on the basis of
benefits received from indirect activities i.e;
ordering, setting up assuring quality etc.”
Charted Institute of
Management Accounting(CIMA)
4. Contd……
v
ABC facilitates strategic costs management.
ABC not only show how activities consumes
resources and how products or customers
trigger activities but also assigns costs to
product s or customers according to the
resources they consume.
v
ABC describes a firm as a series of activities
whose performance is designed to satisfy
customer’s need. It provides information to
the manager to manage activities to improve
5. Benefits
•
ABC helps to understanding the behavior of
overhead costs and their relationship to
product, service customers and market
segments.
•
ABC helps to allocate the resources to those
activities that will increase shareholders value.
•
ABC links profitability analysis to operational
decisions.
6. Contd……
•
ABC ensures the costs of non-value added
activities is visible to management.
•
ABC provides the right information for
performance measurement because it focuses
on activities rather than the resources.
•
ABC provides accurate information on profit
margin and performance measurement for
profit improvement.
7. Contd……..
•
ABC gives an opportunities to improve their
competitive position through better
informations.
