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ABC is Activity-Based costing and it is used to allocate overhead based on activities . Like handling ,set-up of machine , procurement and etc.... It is better than the tradition way which uses direct labor hour , machine hour and direct labor cost only . But it is not GAAP because it allocate non- manufacturing activities to cost object . But in ABC we can eliminate non-value added activities .
Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities.
IMA (Chartered Institute of Management Accountants) defines 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.
Activity Based Costing in simple term called ABC.
It is a method of assigning the cost to the product. The product life cycle is divided in to the phases where each phase define an activity and that activity carries some cost. by using basic average method a certain unit cost is obtained, that is than classified as the Activity Cost.
At the time of completion the cost of good sold, All activity Costs are accumulated and charged to the product.
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The activity based costing approach splits the total overhead cost into multiple cost pools and then assigns these cost in each pool to a product using a calculated cost driver rate.
The cost pool is the grouping of overhead that are similar in nature or arise from the same activity. Example of cost pool is set up cost, material handling cost etc.
A cost driver is the activity that results in cost being accumulated in a cost pool. Thus for the set up cost pool the cost driver will be number of set ups.
cost driver rate is calculated as cost pool/ total number of related cost driver ( set up cost pool / total number of set ups). This rate will then be multiplied with the cost driver of the specific product to accurately allocate the overhead to it.
Activity Based Costing. It is a recent approach that manufacturers' accountants have started using to allocate indirect overhead costs.
Activity-Based Costing: a means of attempting to accurately apply costs of running a business to a specific product or service.
Entire activity based costing may call costing ABC
ABC is costing system which allocate cost according to the cause and effect relation
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