1. ACTIVITY BASED
COSTING

2. Meaning
• Activity-Based Costing is a methodology that assigns
resources to activities, and activities to cost objects
based on a cause-and-effect relationship.
• ABC is that costing in which costs are first traced to
activities and then to the products.
• It is a costing system which focuses on activities
performed to produce products.
• Activities are responsible for incurrence of Costs.

3. • Provide Quality of information to design a cost
system.
• Distinction between cost behavior patterns
which are volume, diversity, events & time.
• Cost driver need to be identified

4. Identify activities
Determine cost for each activity
Determine cost drivers
Collect activity data
Calculate product cost

5. Benefits / Advantages of ABC
• Focus attention on Activities
• Most accurate product / service costs
• Managers manage activities and not products
• ABC focuses on cause and effect relationship
• ABC highlights problem areas easily

6. Limitations / Weakness of ABC
• ABC fails to encourage managers to think
about changing work processes
• ABC does not conform to GAAP
• Costly for long run
• ABC does not encourage the identification and
removal of constraints creating delays and
excesses

7. Difference between ABC and
Absorption Costing

8. Examples of Activity and its
Cost Drivers
• Machine Set-up • No. of Production Runs
• Purchase Materials • No. of orders Placed
• Warehousing • Items in Stock
• Material Handling • No. of Parts
• Inspection • Inspection per Item
• Quality Testing • Hours of Test Time
• Receiving Material • No. of Receiving Orders
• Packing • No. of Packing Orders
• Store Delivery • No. of Store Delivers
• Line Item Ordering • No. of Line Items