Overview
- Activity-Based Costing (ABC)
- Allocation of costs to activities
- More accurate product costing
Key Components
- Activities
- Actions that incur costs (e.g., setup, production)
- Cost Drivers
- Factors that cause costs to increase (e.g., machine hours, labor hours)
- Cost Pools
- Grouping of costs associated with specific activities (e.g. machine hours mapped by electricity bill)
Steps in ABC
- Identify activities
- Assign costs to each activity (cost pools)
- Determine cost drivers for activities
- Calculate activity rates (cost per driver unit)
- Allocate costs to products based on usage of cost drivers
Advantages
- Greater accuracy in product costing
- Better understanding of overhead costs
- Enhanced decision-making for pricing and budgeting
Disadvantages
- Complexity in implementation
- Requires detailed data collection
- Higher administrative costs
Conclusion
- ABC method supports strategic financial management
- Valuable for companies with diverse products and overhead costs