Activity Base Costing System and Simple Steps to Find Cost Under it

Simple Meaning of Activity based Costing

These days , Activity based costing become more popular in Industry whose product becomes after large number of activities . So , in MBA , M.Com. , CA , ICWAI and B.Com. , this topic is included . Till now , many commerce graduate could not understand it properly.

Actually , it is the improvement of Absorption Costing System which was used in 1980 to 1985 for allocation of overheads on the product . But after this cost is not on activity representative . After 1990 , a new revolution will come in the field of cost accounting in India and Now total cost of products is calculated on the activity basis not volume of product .

If we have to give simple definition of Activity base Costing , then we can say ,

" It is the system in which we identify all the activities and calculate the total cost and then we calculate cost driver's rate on activity cost and after this we find total cost by multiplying cost driver rate with a particular product used in activities . "

Activity Based costing is known popularly as Modern ABC System of Cost Accounting .

More Explanation with Example

Suppose , you have to make a Car and car is the the product which completes after 100 and more activity which we can for this we can make its 100 and more cost centers and its indirect cost can be calculated in each cost center which can be totalled and then we can calculated Cost driver rate after dividing total activity cost with nos. of cost driver . Cost driver means all the factor which affect production indirectly , it may include no. of machines setup , no. of employees , no. of other miscellaneous items. After multiply cost driver rate of one car production with total no. of times used on the basis of machine hour.

Main Steps of Calculating total Cost Under Activity based Costing

Today is the time of technology and it has decreased the direct cost by using of machine but it also increases indirect cost , suppose , If I am doing blogging , then my computer's value is reducing by charging of depreciation . So , finding of total cost by assigning indirect cost on direct cost need following simple four steps .

Ist Step

Identify the Activities

First of all we identify all activities in production . It may be 200 activity or more and on this basis , we can make Cost Centers .

2nd Step

Calculate the Cost of All Activities

After finding and identifying the activities , we have to calculate total cost of every activity and then add it and calculate total cost of all activities .

3rd Step

Calculate Cost Driver Rate

This is calculated with following formula

= Total cost of all activities / No. of Cost Drivers

4th Step

Calculate the total Cost of Product

= Cost Driver Rate X No. of Machine Hour Time Used on Product

Following Sheet will Show you What have to Calculate in Activity Base Costing !

Benefits of Activity Based Costing / ABC

  1. With the help of ABC , we can reduce indirect cost after assigning it on product directly.
  2. With the help of ABC , we can Solve many Cost problems after making good Balanced Scorecard
  3. With the help of ABC , we can easily fix our price , if total cost is more , then price can be increased .
  4. With the help of ABC , budgeted decision can be taken .
  5. With the help of ABC , Responsibility Accounting can be used for more effective result .
Some of Important Facts Relating to Activity Base Costing
  • Robin Cooper and Robert S. Kaplan were two writers who introduced ABC Concept first in 1988 in their Articles . They explained its theory in their book " Accounting and Management: A Field Study Perspective ."
  • USA's first organisation "Consortium for Advanced Management-International " is studying and formalizing its principles .

Download our Accounting eBooks

Financial Accounting eBook

Download Now »

Cost Accounting eBook

Download Now »

Corporate Accounting eBook

Download Now »

Management Accounting eBook

Download Now »






access account accountant Accounting accounting definitions accounting ebook Accounting education accounting procedure accounting process outsourcing Accounting Software advance advertising africa Amalgamation amendments announcements Annuity assets audit auditing Australia B.Com. balance sheet bank Bank reconciliation banking basic accounting BBA benefits best bill black money blog bloggers book keeping bookkeeping Branch Accounting - full tutorial budget Budget variance business businessman CA calculator canada capital capital budgeting career cash cash book cash flow statement Chiense children china class coaching coins college commerce commerce students company computer computer accounting conference Contact vinod kumar Control Your Spending corporate accounting cost cost accounting cost center cost centre CPA credit credit card cs currency data Debit and credit debit cards debt debtor degree depletion depreciation Diwali Messages documents dollar domain Downloads Dubai e-accounting earning education Education Loans email employee EPF ERP euromoney examination excel excise duty expenses facebook factor of loan fans feature fifo FII fiji finacle finance Finance Journal Entries Financial financial accounting fire insurance flickr flow forensic forex formula france fraud free fun function fund GAAP GDP gdr germany gold goodwill goodwill accounting google google apps Google Adsense google apps google base google buzz google calendar Google docs google finance google fusion tables google talk govt. GST guide health Hindi Hindi Language history holding company How to treat FBT in Tally 9 HRA ICAI ICAWI ICICI Bank IFRS income income statement Income Tax India indian railway Indonesia inflation inflation accounting infographics information inspiration insurance insurance accounting Intangible interest international Internet Introduction of Tally 9 inventory investment investment in Shares invoice IT Japan Job costing journal entries Journal Entries eBook Help Kalculate keyboard kindle kuwait laptop law LBT learning lease lecture ledger leducation Leverage Analysis liabilities lifo linkedin loan logical point loss loss of profit M.Com. m.phil malaysia management accounting manual accounting manufacturing account market marketing mastercard material MBA MCA media migration mobile money ms word ms. excel multi currency in tally 9 Multicurrency Accounting mutual fund national security new and sacrifice ratio new york times new zealand news NGO nonprofit-accounting North Georgia Mountains NPV NSE odbc office oman online application online accounting Online Accounting Course otcei pakistan parents Partnership pay pal pdf Personal Finance pie chart pie chart of income pnb podcast ppf presentation price privacy policy prize money prof. vinod kumar profit profit and loss account project management provision purchase puzzles quickbooks Quote quotes quotes of svtuition rating agency ratio analysis RBI readers real estate rectification of errors remote control reports reserves responsibility accounting retirement revenue Revenue reserves review risk rupees salary sale saudi arabia saving sbi scholarship school SEBI security service tax share share trading Shares shri lanka singapore sms social accounting society solution South Africa stock stock exchange structure student students study subsidiary company svtuition swiss bank tally tally 9 Tally 7.2 Tally 9 Tally.ERP 9 tanzania tax Tax Accounting TDS teacher teaching technology test testimonial testimonials thailand tips trading trading on equity transaction trend trial balance truthfulness tuition twitter UAE UGC - NET Commerce UK United Arab Emirates university usa valuation VAT Video Voucher and vouching Wealth wikipedia working capital youtube
Accounting Education: Activity Base Costing System and Simple Steps to Find Cost Under it
Activity Base Costing System and Simple Steps to Find Cost Under it
Accounting Education
Not found any lecture VIEW ALL Continue reading Reply Cancel reply Delete By Home PAGES Lectures View All RECOMMENDED FOR YOU Category ARCHIVE SEARCH ALL Lectures Not found any lecture match with your request, please help to write it and send it to our email at for making this website free accounting and finance encyclopedia. Back Home Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sun Mon Tue Wed Thu Fri Sat January February March April May June July August September October November December Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec just now 1 minute ago $$1$$ minutes ago 1 hour ago $$1$$ hours ago Yesterday $$1$$ days ago $$1$$ weeks ago more than 5 weeks ago Followers Follow THIS CONTENT IS PREMIUM Please share to unlock