Activity Based Costing and Management

 

An Introduction to Activity Based Costing (ABC)

What is ABC ?

Activity Based costing is a methodology that measures the cost and performance of activities, resources and cost objects. Cost objects consume activities and activities consume resources. 

Resource costs are assigned to activities based on their use of those resources, and activity costs are reassigned to cost objects (outputs) based on the cost objects’ proportional use of activities. 

Activity based costing incorporates casual relationships between cost objects and activities and between activities and resources. The assignment of resource cost to activities is based on resource drivers and that of activity costs to cost objects on activity drivers.

Click here to view a pictorial representation of cost assignment in the ABC system

 

The cost assignment view:

This view represents the cost measurement aspect of a costing system. Resources are consumed by activities and activities are demanded by cost objects. The costs of resources are assigned to activities through resource drivers and costs of activities are assigned to cost objects through activity drivers.

The Process view:

The process view represents the measurement of performance of an activity. Performance measurements are defined to identify how well an activity is performed. The key terms in Process view are Cost Driver and Performance measure.

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