Activity Based Costing

Table of Content

Introduction to Activity Based Costing Page 2

Objectives of ABC Page 2

Traditional Based Costing Page 4

Traditional Cost Accounting V’s Activity Based Costing Page 4

Benefits of ABC Page 9

Bibliography Page 10

Introduction to Activity Based Costing

Activity Based costing is an accounting technique that helps companies to determine the actual cost associated with the service and products they are producing and lets them monitor the activities of the company. ABC model analyses and cost the activities of all the processes in the company. It was pioneered by Professor Kaplan and Cooper of Harvard University it replaces the old way of product costing known as traditional costing and is considered a far more accurate way of measure activities of a company. As companies now a days are producing more products and services which are consuming different overhead resources, its easier to allocate cost to certain products by using the ACB method. Activity analysis is the most critical aspects of ABC. It is the process of indentifying appropriate out-put measures of resources and activities, which then shows their effect the cost of making the products and services. A survey that was done in 1999 on large UK businesses revealed that, on average 15% of businesses fully used the ABC approach when they were dealing with full costing, 7% partially used it and the remaining 77% didn’t use it at all. It showed that 53% of the industry using it was Financial and commercial industry. The manufacturing industries were only 3% of the industries to use this approach. This is unusual as you would think that it would be the biggest industry as they have a lot of cost drivers.

Objectives of ABC

• Provides the company with a range of information that helps support their decision in areas such as marketing, operations and customer support.

• To price jobs more efficiently when they are looking for new business as they can measure the cost of the activities involved in the business.

• Also helps the company to cuts its losses by identifying where their time effort and money are being wasted and where unnecessary