Activity Based Costing in Financial Management

Financial Management &
Decision Making

Table of content
 Definition of Activity Based Costing
 Comparison with other costing systems
 Activity Based Costing of xyz organisation
 Resources
 Resources drivers
 Activity Drivers
 Activity Cost Drivers
 Cost Objects
 Advantages and Disadvantages of the business using ABC

Introduction
This is costing method that assign overhead and indirect cost that is
related to the product and services and this accounting method of costing
recognize the relationship between the cost, overhead activities and
manufactured products. This basically used in manufacturing industry to
enhance the reliability of cost data and better classifying the cost of
organizations.

Definition of Activity based costing
This is most accurate method of product and services to assign the
manufacturing overhead cost to products in more logical manner than the
traditional approach of simply allocating cost to the activities.

Comparison of ABC with other costing system
Job costing costing- This refers to material, labour and overhead
cost are complied for the individual and it is accumulation process
highly detailed and labour-intensive. The company has started and
in first the $10000 of direct material cost, $4500 of direct labour
cost and $2000 overhead expenses. At the month end the system has
complied of total $16500 and this refers as Job costing method.

Continued..
Activity based costing – This identifies all specific overhead
related to the manufacture of each product and every kind of goods
and services. For example if total utility id $20000 and number of
direct labour hours worked. So, the total utility cost driver id
($20000 / 1000 hours) and overhead application rate id $20.