Activity Based Costing (ABC)

ABC refines a costing system by identifying individual activities as the fundamental cost objects.

Activities may include:

a. Design products & Processes
b. Operate machines to manufacture
c. Clean & maintain product
d. Distribute product to customers


To Implement ABC:

1. Identify the products that are the chosen cost objects
2. Identify the direct costs of the products
3. Select the activities & cost-allocation bases to use for allocating indirect costs to the products
4. Identify the indirect costs associated with each cost-allocation base
5. Compute the rate per unit of each cost-allocation base
6. Compute the indirect costs allocated to the products
7. Compute the total cost of the products by adding all direct and indirect costs assigned to the products