Meaning,Definition,characteristics,Steps involved in ABC,Traditional costing Vs Activity based costing,Elements involved in activity based costing,

2.  Activity-based costing (ABC) is an accounting
method that identifies and assigns costs to
overhead activities and then assigns those
costs to products. An activity-based costing
(ABC) system recognizes the relationship
between costs, overhead activities, and
manufactured products, and, through this
relationship, it assigns indirect costs to
products less arbitrarily than traditional
methods.

4.  1. It raises the number of cost pools used to
accumulate overhead costs. The number of
pools relies on the cost driving activities. So,
in spite of accumulating overhead costs-in a
single company-wise pool or departmental
pools, the costs are accrued through
activities.
 2. It charges overhead costs to dissimilar jobs
or products in proportion to the cost driving
activities instead of a blanket rate relies on
direct labour cost or direct hours or machine
hours.

5. 3. It enhances the traceability of the overhead
costs that results in more precise unit cost data
for management.
4. Identification of cost throughout activities
and their causes not only assist in calculation
of more precise cost of a product or a job but
also remove non-value added activities. The
elimination of non-value added activities would
make down the cost of the product. Actually
this is the essence of activity based costing.

6. Step 1: Identify the products that are the
chosen cost objects.
 Step 2: Identify Identify the direct costs of
the products products.
 Step 3: Select the activities and cost-
allocation bases to use for allocating
allocating indirect indirect costs to the
products products.

7. Step 4: Identify the indirect costs associated
with each costallocation base (activity).
Step 5: Compute the rate per unit of each
cost-allocation base ( y) activity) used to
allocate indirect costs to the products.
 Step 6: Compute the indirect costs allocated
to the products.
Step 7: Compute the total costs of the
products by adding all direct and indirect
costs assigned to the products.

8. Traditional Costing :
 In traditional costing system, allocation of
indirect costs is made based on some
common allocation bases such as labour
hour, machine hour.
 The main drawback of this method is that, it
pools all the indirect costs and allocates them
using the allocation bases to departments.
 In most of the cases, this allocation method
does not make sense as it pools the indirect
costs of all products of different stages.

9. In the traditional method, it allocates
overheads first to the individual departments
then reallocates the costs to products.
Especially in the modern world, traditional
method loses its applicability as a single
company produces larger number of different
types of product without using all
departments. So, cost experts came up with
a new concept call activity based costing
(ABC), which was simply reinforced the
existing traditional costing method.

10. Activity Based Costing:
 Activity based costing (ABC) can be defined as an
approach to costing that identifies individual
activities as fundamental cost objects.
 In this method, the cost of individual activities are
assigned first, and then, that is used as the basis of
assigning cost to the ultimate cost objects.
 That is in activity based costing, it assigns over
heads to each activity first, then reallocates that cost
to the individual product or service.
 Number of purchase order, number of inspections,
number of production designs are some of the cost
drivers used in allocating overhead costs.

11. Activity: An activity can consist of one or more of the
tasks associated with one another to attain an objective.
Activity cost centre (pool):The result of
identifying the overhead cost to an activity is called an
cost pool.
Cost driver :These are used to assign cost to
products by using an appropriate measure of
resources consumed by each activity.
Process:When related activities are grouped
together ,it is known as a process.

12. Cost objects:These are links to the whole of
the enterprise.
Non-value adding activities: Certain activities
do not contribute anything to the value of a
product but which are required to be carried out
in the organisation because of reasons beyond
the control of management.

14. Thank you