ABC is an accounting methodology that assign cost(direct and indirect) to activities rather than products and services that consume them. The basic feature of ABC is its focus on activities as the fundamental cost objects.It uses activities as the basic for calculating the costs of products and services.CIMA Define “Cost attribution to cost units on the basic of benefit received from indirect activities e.g,ordering, setting up, assuring quality”.
The short-term variable costs should be identified to products using volume related cost drivers such as direct labour hour, direct material cost, machine hour etc.. Kalpan and cooper claimed that volume related cost drivers are inappropriate for tracing log-term variable costs to products because they are driven by complexity and variety and not by volume and the key understanding what cause (divers) overhead costs in transactions undertaken by support departments cost and factory overheads to product lines under ABC system is shown in the following figures:
Service Department Activity cost pools & Product linesFactory overheadsAssigning costs of Application of costindividual activities driver rates
Direct Labor General LedgerPayroll taxes XXXMachine maintenance XXXPurchasing Dept. labor XXXFringe benefits XXX Machine HoursPurchasing Dept. XXXSuppliesEquipment XXXdepreciationElectricity XXX # of Purchase OrdersUnemployment XXXinsuranceWhich overhead costs do you think are driven by direct labor hours?
Direct Labor General LedgerPayroll taxes XXX XXXX XXXXMachine maintenance XXX XXXXPurchasing Dept. labor XXX XXXXXFringe benefits XXX Machine HoursUnemployment XXXinsuranceEquipment XXXdepreciationElectricity XXX # of Purchase OrdersPurchasing Dept. XXXSupplies Overhead driver by direct labor hours
Direct Labor General LedgerPayroll taxes XXX XXXX XXXXMachine maintenance XXX XXXXPurchasing Dept. labor XXX XXXXXFringe benefits XXX Machine HoursPurchasing Dept. XXX XXXXSupplies XXXXEquipment XXX XXXX XXXXXdepreciationElectricity XXX # of Purchase OrdersUnemployment XXXinsuranceWhich overhead costs aredriven by machine hours?
Direct Labor General LedgerPayroll taxes XXX XXXX XXXXMachine maintenance XXX XXXXFringe benefits XXX XXXXXPurchasing Dept. XXX Machine HoursSupplies XXXXEquipment XXX XXXXdepreciation XXXXElectricity XXX XXXXXUnemployment XXX # of Purchase Ordersinsurance XXXX XXXAnd finally, which overhead costs XXXXXare driven by # of purchase orders?
Activities DriversUnit LevelAcquire and Use material for containers No. of ContainersAcquire and Use material for baby-care productsproducts No. ofBatch LevelSet up manually controlled machines No. of batches of containersSet up computer controlled machines No. of batches of B. ProdustProduct LevelDesign and manufacture moulds No.of moulds requiredUse manually controlled machines Product type (containers)Use conputer controlled machines Product type (B.Products)Customer LevelConsult customers No. of consultationsProvide warehousing for customers No. of cubit feetFaciltiy LevelManage workers Salaries