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  Steps of Activity Based Costing

Steps of Activity Based Costing

1. The costing system that is already existing should be capable to adopt the activity based costing system that is why product costs can be precisely determined and correct pricing decisions can be taken in a competitive business environment.

2. A substantial plan of the work place and listing of pay-rolls can be observed, to start with, supplemented through holding interviews with staff. Such type of an activity analysis can throw light on how the work spaces might be make use and how the staff members have spent their time after chalking out the dissimilar tasks in detail, the major activity can be identified. For it, a cost-benefit analysis is needed to be performed. An activity can be a extremely small job or a combination of various small jobs.

3. The integrate past actual cost or average cost of a particular period might be employed within the system.

4. Cost centres on cost pools should contain a similarity within financial accounting and cost accounting systems in order to include a comparative utility.

5. Cost of resources consumed are to be related or allocated (apportioned) to every activity, in order to observe the amount spent through the enterprise on each of their activity. Techniques of direct attribution, apportionment on a reasonable source in case of joint costs and the techniques of estimation of specific costs might all be suitably utilised for assignment of costs to activity cost centres.

6. Copper categorized manufacturing activities as follow:

A. Unit-level activities;

B. Batch-level activities;

C. Product-sustaining activities;

D. Facility-sustaining activities;

A. Unit-level activities.

These are activities that are performed every time a unit of product or service is formed. Such types of activities consume resources proportionate to the production or sales quantity.

B. Batch-level activities.

These are carried out every time a batch operation is carried out. Such type of a cost varies along with number of batches made but is similar for all units in the batch.

C. Product-sustaining activities.

These are carried out to support diversity of products. Such types of costs are not in any way linked with the number of production units or batches made.

D. Facility-sustaining activities.

These are carried out to support manufacturing process. Such types of costs are common to all the products manufactured. These are not assigned to products individually.

7. Outputs are needed to be categorically identified since without it, the essential purpose or applying the system cannot be meaningful.

8. Interviews should be accomplished with concerned employees to decide the cost drivers for each activity. The cost drivers should be simply measurable. Past data should be made presented in order to ascertain potential cost drivers. At last the management can choose a single cost driver or several cost drivers for the activities.

9. The cost driver rates are applied to products. The aggregate cost can be calculated through multiplying the rate of consumption of resources (cost driver rate) along with the number of activities.

10. The activity cost and all the applicable data employed for computation purposes should be tested to calculate and judge the reliability of activity based costing system adopted.

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