The document discusses Activity-Based Costing (ABC), defining it as the allocation of costs to cost units based on benefits received from indirect activities. It outlines stages for implementing an ABC system, including recording costs, identifying activities and cost drivers, and apportioning overheads. The advantages of ABC include more reliable product costing and better pricing decisions, while disadvantages include its complexity and potential costs.

1. ABC
By Sanjaya Jayasundara
(Activity-Based Costing)

2. Activity based costing: defined by
CIMA as ‘cost attribution to cost units
on the basis o benefit received from
indirect activities.’

3. Cost drivers : activities undertaken in
each department; they are the costs o
activities that form part of the process
of making a product.

4. Cost driver rate = Cost of activity
number of times that
activity is performed

5. Cost pools: accounts that collect the costs
incurred by each activity.

6. Stages in using an Activity-Based Costing System
01. Record and classify all costs
02. Identify the activities producing the overhead cost
03. Identify cost drivers
04. Apportion appropriate overheads to the cost drivers.
05. Calculate the cost driver rate.
06. Absorb both indirect and direct costs into the
production or service.

7. Advantages of Activity-Based Costing System
01. ABC provides more reliable information for
product costing since it is based on activity cost driver.
02. ABC facilitates pricing decisions.
03. Set benchmarks for planning and control purposes.
04. Identify individual products or services that are
unprofitable and overpriced

8. Dis-advantages of Activity-Based Costing System
01. It is time consuming to implement ABC.
02. Determining the cost driver may be difficult.
03. Measuring the quantity of each cost driver
consumed may be difficult.
04. It is costly because it may be necessary to employ
a specialist to implement the ABC system

9. All the best children..!
Sanjaya Jayasundara