Activity Based Costing

The ABC method starts with an old cost-accounting system, but it shows the common costs and dedicated support services that are directly associated with a product. Activity-based costing is a commonly used technique to systemize a traditional costing system. Activity-based costing, or ABC, is a costing method that first assigns costs to activities and then to goods and services based on how much each good or service uses the activities. This is the costing method which focuses on allocating the cost on the bases of different drivers.

In the activity based costing, the statement of cost pool and the statement of total cost are prepared. The main task involved in activity based costing is the identification of cost drivers, on the basis of which the overheads are allocated. The various types of cost drivers are number of set up, number of requisition, number of delivery, number of orders, etc. and the overheads are set up cost, inspection, stores (material handling charges), packing charges, design/engineering etc.

The traditional costing concentrates on full costing approach i.e. adding variable cost as well as fixed cost to determine the total cost of the product. The simple industries which do not have complicated or typical manufacturing process generally uses traditional costing whereas industries like automobiles requiring complicated procedures uses activity based costing.

Management accounting has emerged as one of the most active topic in the areas of current management research. The management accounting can be called as the method of making the management reports and accounts that ensure correct and timely financial and statistical information needed by the managers to make regular operating short term decisions. There has been considerable improvement in the field of cost accounting in past few years. Various new concepts such as ABC costing; Back-flush costing etc. has been introduced. The Activity based costing is the

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