What is Activity-Based Costing System?
Some managers or readers who are assigned to build up an activity based costing system might be at a loss on how to even embark on this assignment.To do it, please look at the earlier articles on steps, conditions, factors,etc are provided.
In this article, the overview approach is given to implement the activity based costing procedure of a company:
- First study the organization to identify all those activities which support production. Some of these support activities are inspection, setting up machineries, moving materials around the factory and purchasing materials. Note that support activities need not be single department. An activity may involve several different departments like purchasing materials can involve the Buying Department and the Inspection Department, Legal and Accounting departments. Some departments may carry out several activities for example human resources department may be responsible for recruitment, keeping staff records, industrial relations and training. Another multi-tasking department is the accounts department;
- Identify the specific costs of each activity ie thse costs which the activity actually causes. Collect the total costs of an activity into a “cost pool” which is similar to a cost centre in an absorption costing system. Note that the activity based cost pool WILL NOT contain any apportioned costs.
- Find out what causes the value of the cost pool to increase. The factor which cases the value of the cost pool to change is called its ” cost driver”. For example the number of purchase orders goes up, then purchase orders wil be the cost driver. A single unit increase in the quantity of a cost driver will have no effect on costs. However a large and permanent increase in the volume of a cost driver will cause the cost driver in that period.
- Identify the number of units of each cost driver that are used to make each product and
- Use the number of units of each cost driver that are used to make each product to attach(attribute) the cost of each activity to products.
- Steps In Implementing Activity-Based Costing System(ABC):
- Introduction and Benefits/Advantages of Activity-Based-Costing System (ABC)
- Activity Based Costing As a One Step Attribution System Compared To Other Traditional Systems
- Management Accounting Question ABC No2 On Activity Based Costing
- Answer To Management Accounting Question No:ABC2 on Activity Based Costing
- Limitations of Activity-Based Costing (ABC) System
- Types of Activity Measures & Activity Cost Pool And Corresponding Activity Measures
November 12, 2007
Tags: activity based costing system
Posted in: Activity-Based Costing
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