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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 . Name