--Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. --This model assigns more indirect costs (overhead) into direct costs compared to conventional costing. --ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs. **--Objectives** --With ABC, a company can soundly estimate the cost elements of entire products, activities and services. That may help inform a company's decision to either: -Identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced (product and service portfolio aim)Or, - identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim). In a business organization, the ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives. **--Methodology** Methodology of ABC focuses on cost allocation in operational management. ABC helps to segregate -Fixed cost -Variable cost -Overhead cost --The split of cost helps to identify cost drivers, if achieved. Direct labour and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The cost driver is a factor that creates or drives the cost of the activity. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product's transactions (cost driver) takes at the counter and then by measuring the number of each type of transaction. For the activity of running machinery, the driver is likely to be machine operating hours. That is, machine operating hours drive labor, maintenance, and power cost during the running machinery activity.
Under Conventional / Traditional costing Overheads are allocated to the products on volume based measures e.g. labour hours, machine hours, units produced. With the change in business environment, a) Amount of direct labour cost used in many Industries has decreased. b) Total overhead from depreciation on equipment utilities repairs maintenance has incurred.
Hai uma The traditional system of costing suffers from certain limitations. It fails to precisely assign the overhead costs into product units. Therefore activity-based costing system has recently been developed to overcome the limitations of traditional costing system. The activity costing system is based on premise that activities make a product. Activity- based costing (ABC) is the determination of product cost based on the activity needed for producing a product. The activities required to produce a product or render service consume a cost. Therefore, an insight into the expenses consumed by all those activities performed for the manufacturing of finished products and sale is very important. A number of researched studies have shown the increasing utility of activity-based costing on overheads allocation and apportionment for product cost determination. Product cost determination under activity-based costing is made on the basis of cost driver required for producing goods or delivering services. Activity-based costing is becoming more effective in costing of multi-products produced by industries and executing customers' orders. Activity-based costing (ABC) is an effective management approach for distributing and controlling the overhead costs. Overhead analysis can be made more accurate by using ABC techniques for a wide range of products, for product costing and profitability analysis and for distribution and control of the overheads appropriately.
Hello Uma, **Activity Based Costing** is an overhead Cost allocation system that allocates overhead to multiple **activity cost pools** and assigns the activity cost pools to product or services by means of **Cost Drivers** that represents the activities used. **Need for introduction of ABC** Under Conventional / Traditional costing Overheads are allocated to the products on volume based measures e.g. labour hours, machine hours, units produced. With the change in business environment, a) Amount of direct labour cost used in many Industries has decreased. b) Total overhead from depreciation on equipment utilities repairs maintenance has incurred. Now, **Activity** means any event, action, transaction, or work sequence that causes a Cost to be incurred in producing a product or providing a service. **Activity Cost Pool** means the overhead cost allocated to a distinct type of activity or related activities. Examples :- • Painting cost Pool • Setting Up of machines • Inspecting and testing **Cost Driver** means The Overhead Cost allocated to a distinct type of activity or related activities. Examples :- • Painting cost Pool • Setting Up of machines • Inspecting and testing **Basics of ABC :-** 1. Cost of a product is the sum of the costs of all activities required to manufacture and deliver the product. 2. Products do not consume costs directly. 3. Money is spent on activities. 4. Activities are consumed by product/services. 5. ABC assigns Costs to Products by tracing expenses to “activities”. Each Product is charged based on the extent to which it used an activity. 6. The primary objective of ABC is to assign costs that reflect/mirror the physical dynamics of the business. 7. Provides ways of assigning the costs of indirect support resources to activities, business processes, customers, products. 8. It recognizes that many organisational resources are required not for physical production of units of product but to provide a broad array of support activities. Regards Bharat Makhija
Hie Uma, **Definition of 'Activity-Based Costing - ABC'** An accounting method that identifies the activities that a firm performs, and then assigns indirect costs to products. An activity based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs to products less arbitrarily than traditional methods.
**ACTIVITY BASED COSTING* Hi, Activity based costing is a method for assigning costs to products, services, projects, tasks, or acquisitions to all products and services according to the actual consumption by each. It is a technique for assigning costs to products service customers etc The traditional costing system suffers from drawbacks so ABC costing came . ABC costing assigns cost to all the resources based on the consumption by them. Thanks
Name suggests that, it is based on the Activity For example, Your organization doing some project or work it may contains various activities, for assign the cost of each activity with resource to the project or services Note that, Your organization provides catering Services, the catering service includes many activities like, a. Preparation of foods b. Delivery of foods c. serving of food Each one is call it as activity which incure the cost to the company As per Wiki: Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each.