Activity Based Costing - Definition and Concept
Activity based costing
Definition and concept
‘An approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.’
Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs(overhead) into direct costs compared to conventional costing.
CIMA Official Terminology, 2005
A development of the principles of activity based costing (ABC) is activity based management (ABM).
Operational ABM is defined as:
‘Actions, based on activity driver analysis, that increase efficiency, lower costs and/or improve asset utilisation.’
CIMA Official Terminology, 2005
Strategic ABM is defined as:‘Actions, based on activity based cost analysis, that aim to change the demand for activities so as to improve profitability.’
CIMA Official Terminology, 2005
The main focus of this topic gateway is ABC. However, the development of ABC into ABM will be discussed further under Application.
The concept of ABC was first defined in the late 1980s by Robert Kaplan and William Burns. Initially ABC focused on manufacturing industry where technological developments and productivity improvements had reduced the proportion of direct labour and material costs, but increased the proportion of indirect or overhead costs.
Comparison of traditional costing and ABC
The traditional method of costing relied on the arbitrary addition of a proportion of overhead costs on to direct costs to attain a total product cost. The traditional approach to cost allocation relies on three basic steps.
1. Accumulate costs within a production or non-production department.
2.
Definition and concept
‘An approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.’
Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs(overhead) into direct costs compared to conventional costing.
CIMA Official Terminology, 2005
A development of the principles of activity based costing (ABC) is activity based management (ABM).
Operational ABM is defined as:
‘Actions, based on activity driver analysis, that increase efficiency, lower costs and/or improve asset utilisation.’
CIMA Official Terminology, 2005
Strategic ABM is defined as:‘Actions, based on activity based cost analysis, that aim to change the demand for activities so as to improve profitability.’
CIMA Official Terminology, 2005
The main focus of this topic gateway is ABC. However, the development of ABC into ABM will be discussed further under Application.
The concept of ABC was first defined in the late 1980s by Robert Kaplan and William Burns. Initially ABC focused on manufacturing industry where technological developments and productivity improvements had reduced the proportion of direct labour and material costs, but increased the proportion of indirect or overhead costs.
Comparison of traditional costing and ABC
The traditional method of costing relied on the arbitrary addition of a proportion of overhead costs on to direct costs to attain a total product cost. The traditional approach to cost allocation relies on three basic steps.
1. Accumulate costs within a production or non-production department.
2.