ABC COSTING,BASICS AND STEPS OF ACTIVITY BASED COSTING AND ACTIVITY BASED COSTING IMPLEMENTATION.

1. ACTIVITY BASED COSTING
BY
ShAShANk ShEkhAr

2. BASICS Of ABC
• Cost of a product is the sum of the costs
of all activities required to manufacture
and deliver the product.
• Products do not consume costs directly.
• Money is spent on activities
• Activities are consumed by
product/services

3. Conventional Costing AB Costing
Economic
Element
Expenses Resources
Work
Activities
Performed
Cost Objects
Product or
Cost Objects
service

4. CONTINuED..
• ABC assigns Costs to Products by tracing
expenses to “activities”. Each Product is
charged based on the extent to which it
used an activity
• It recognizes that many organizational
resources are required not for physical
production of units of product but to
provide a broad array of support activities.

5. WhAT’S WhAT Of ABC ?
• The activity is the work that is done.
• The resource is what the activity uses to do the work.
• The cost of the activity depends on the quantity of
resources used to accomplish the activity.
• The cost driver for an activity is the factor that influences
the amount of the resources that will be consumed by this
activity.
• The activity driver measures how much of the activity is
used by the cost object.
• The cost object is whatever it is you wish to cost. It could
be a product, service, process, job or customer.

6. STEPS
Step 1: Identify
Resources INVOLVED
Step 2: Identify IN
Activities
ABC
Step 3: Identify
Cost Objects
Step 4: Determine
Resource Drivers
Step 5: Determine
Cost Drivers

7. • Step 1: Identify Resources
– Resources represent the expenditures of an organization. Examples
include production labor, sales and marketing labor, occupancy and
utilities, equipment, and supplies. ABC links these costs to products,
customers, or services.
• Step 2: Identify Activities
– Activities represent the work performed in an organization. By
determining the actual activities that occur in various departments,
such as accounting, customer service, and sales, it is then possible
to more accurately relate these costs to customers, products, and
services.
• Step 3: Identify Cost Objects
– ABC provides profitability by one or more cost object, usually
represented by products, customers, and/or services.
– Cost Object profitability is utilized to identify money losing
customers, to validate separate divisions or business units, or to
measure the performance of individual projects, jobs, or contracts.

8. • Step 4: Determine Resource Drivers
– Resource Drivers provide the link between the expenditures of an
organization and the Activities performed within the organization.
– For example, the total salary of a customer service representative
would likely be allocated to the Activities performed based on the
amount of time spent performing the Activity.
• Step 5: Determine Cost Drivers
– Determination of Cost Drivers completes the last stage of the
model. Cost Drivers trace, or link, the cost of performing
certain Activities to Cost Objects.
– One part of the Ace Trucking's business operation involves making
deliveries by truck. The activity is delivering goods. The costs of this
activity include the truck drivers’ wages, fuel, depreciation of the
truck, insurance, etc. The quantity of the resources that will be
consumed by this activity are influenced by the number of deliveries
made per year. Hence the cost driver could be the number of
deliveries.

9. Summarizing an ABC Model
Identify Identify Identify
Resources Activities Cost Objects
Define Define
Activity Resource
Drivers Drivers
Enter Enter Enter
Calculate
Resource Resource Activity
Costs
Costs Driver Qty. Driver Qty.