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ABC (Activity Based Costing) is an accounting methodology that assign costs to activities rather than products or services. This enables resources & overhead costs to be more accurately assigned to products & services that consume them.
ABC assign cost to activities based on their use of resources. It then assign cost to cost objects, such as products or customers, based on their use of activities. ABC can track the flow of activities in organization by creating a link between the activity (resource consumption) and the cost object. The flow is characterized through four core areas :
• Cost object.
• Cost drivers.
• Resource Cost drivers.
• Activity Cost drivers.
A Cost Object–It is an item for which cost measurement is required e.g. a product or a customer.
A Cost Driver–It is a factor that causes a change in the cost of an activity. There are two categories of cost driver :
A Resource Cost Driver–It is a measure of the quantity of resources consumed by an activity. It is used to assign the cost of a resource to an activity or cost pool.
An Activity Cost Driver–It is a measure of the frequency and intensity of demand, placed on
activities by cost objects. It is used to assign activity costs to cost objects.
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