Cost and Management 1

Activity Based Costing (ABC)

The underlying assumption of activity based costing is entirely different from that of conventional costing systems. The conventional costing system assumes that products cause costs. Activity based costing systems have activities as the fundamental cost objects. Activity based costing systems also assumes that activities cause costs and that cost objects create the demand for activities. 

Activity-based costing (ABC) is a better, more accurate way of allocating overhead.

Recall the steps to product costing

1. Identify the cost object;
2. Identify the direct costs associated with the cost object;
3. Identify overhead costs;
4. Select the cost allocation base for assigning overhead costs to the cost object;
5. Develop the overhead rate per unit for allocating overhead to the cost object.