Activity-based costing (ABC) is a management accounting approach that allocates overhead costs to products and services based on the activities consumed and resources used to produce them. It identifies major activities in a company and traces the costs of each activity back to the products. There are two stages - costs are first allocated to activities, then activities are allocated to products using cost drivers that represent consumption of activities. ABC provides more accurate product costs than traditional volume-based allocation and helps identify unprofitable products. It is useful when overhead costs are significant or product complexity varies widely.

1. ACTIVITY BASED COSTING
(ABC)
SUBMITTED BY
AKSHIT JAIN
ALI MAVLI
ANUJ SHANGARI
ANKUR VYAS
ANUJ KAKKAR
DILIP GOWDA
PRATIK MAHAJANSHETTI
MAYANK MRINAL

2. WHAT IS ABC
• Activity Based Costing is a management accounting approach
which allocate all direct and indirect (overhead) costs to cost
objects (products and services) in order to help management
understand critical business information. It allocates direct and
indirect costs to products and services based on the level of
activities used to create and deliver those products and services.
• CIMA (Chartered Institute of Management Accountants)
defines ABC as an approach to the costing and monitoring of
activities which involves tracing resource consumption and
costing final outputs.

3. OBJECTIVES OF ABC
Identifying available resources & resource-consuming activities
Assigning costs of available resources to activities
Assigning costs of activities to cost objects(i.e. products, batches
of products)

4. STAGES OF ALLOCATION IN ABC
There is Two Stages of Allocation in Activity-Based Costing
Stage 1: Allocation to Activities
The first step in Activity-Based Costing is to divide the expenses of certain
overhead activities to a per-event cost.
 Stage 2: Allocation to Production
The second step in activity-based costing is to allocate the activity cost to
each product.

5. TRACING COST TO ACTIVITIES
This step is to identify major activities that cause/drive
overhead costs to be incurred.
Some of the activities are related to production volume (such
as production runs, salary of supervisors and so on) but others
are not (such as inspection/handling of materials, setting up
equipment and so on).
The cost of resources consumed in performing these activities
are grouped into cost pools.

6. Common Activities Associated Costs Cost Driver
Processing purchase order
for materials
Labour costs for workers determining order quantities,
contacting vendors, and preparing purchase orders
Number of purchase
orders processes
Handling material Labour costs for workers handling material, depreciation of
equipment used to move material
Number of material
requisitions
Inspecting incoming
material
Labour costs for workers performing inspections,
depreciation of equipment used to test strength of materials,
tolerances, etc.
Number of receipts
Setting up equipment Labour costs for workers involved in setups, depreciation of
equipment used to adjust equipment
Number of setups
Producing goods using
manufacturing equip.
Depreciation on manufacturing equipment Number of machinehours
Supervising assembly
workers
Salary of assembly supervisors Number of assembly
labour-hours
Inspecting finished goods Labour cost for finished goods inspections, depreciation of
equipment used to test whether finished goods meet
customer specifications, etc.
Number of inspections
Packing customer orders Labour cost for packing workers, cost of packing materials,
etc.
Number of boxes packed

7. TRACING COSTS FROM ACTIVITIES TO
PRODUCTS
The next step is to assign costs to products/jobs using cost drivers as a
measure of activity. Cost drivers represent the quantity of activities used
to produce individual products.
They identify the linkage between activities and cost objects and serve as
quantitative measures of the output of activities. In fact, they are the
central innovation of ABC system. Three types of cost drivers are:
Transaction
Duration
Intensity (Direct charging)

8. Transaction Drivers
Transaction drivers are used to count the frequency of an activity/the number of
times an activity is performed.
Duration Drivers
Duration drivers represents the amount of time required to perform an activity.
Intensity Drivers
Intensity drivers are used to charge directly for the resources used each time an
activity is performed.

9. ADVANTAGES
1. Product cost determination under activity-based costing is more accurate and reliable
because it focuses on the cause and effect linkage of costs and activities in the context of
producing goods.
2. Fixation of selling price for multi-products under activity-based costing is fair and
correct because overheads are allocated on the basis of relevant cost drivers.
3. Control of overheads consisting of fixed and variable becomes possible by controlling
and monitoring activities. Linkage between cost and activities are clearly identified in
activity-based costing and thus provides opportunities to control overhead costs.
4. Sufficient information can be obtained to make decisions about the profitability of
different product lines.
5. Fair allocation of overheads occupy a considerable portion in the total cost components.

10. LIMITATIONS
1. Difficult to identify the overall activities that influence costs.
2. Not easy to select the most suitable cost drive.
3. Difficult to evaluate cost on the basis of activities.
4. Not suitable for small manufacturing concerns.

11. TRADITIONAL COSTING VS ABC
 traditional cost accounting it is assumed that cost objects
consume resources whereas in ABC it is assumed that cost
objects consume activities.
Traditional cost accounting mostly utilizes volume related
allocation bases while ABC uses drivers at various levels.
Traditional cost accounting is structure-oriented whereas ABC
is process-oriented.

12. 12

13. ABC – WHEN DO WE USE IT?
Product lines differ in volume and manufacturing complexity.
Product lines are numerous and diverse, and they require different
degrees of support services.
Overhead costs constitute a significant portion of total costs.
The manufacturing process or number of products has changed
significantly - for example, from labor intensive to capital intensive
automation.
Production or marketing managers are ignoring data provided by the
existing system and are instead using “bootleg” costing data or other
alternative data when pricing or making other product decisions.