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Sample Activity Based Costing System

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Sample Activity Based Costing System
Activity-Based
Costing System
A presentation by

Ahmad Tariq Bhatti
FCMA, FPA, MA (Economics), BSc

Dubai, United Arab Emirates

Activity-Based Costing

Activity-Based Costing System

2

The
Concept
Activity-Based Costing

In contrast to traditional/absorption costing system, ABC system first accumulates overheads costs for each organizational activity, and then assigns the costs of the activities to the products, services, or customers (cost objects) causing that activity.
Activity-Based Costing System

3

Origin

During 1980’s, the limitations of absorption costing system were felt with severity. Companies were looking for a system that could reflect true product cost in order to fight competition. The absorption costing system was designed decades ago, when most companies produced narrow range of products. Further, overhead costs were small enough to make a big difference in the identification of cost of a product. This criticism of absorption costing led to generation of the idea of
ABC system. David Cooper and Robert Kaplan wrote articles on the idea of ABC system in 1990 and 1992. The new system was accepted widely and became reality of the day. Now ABC system has become part of every management accounting text book and being implemented the
Activity-Based Costing System world over.

4

Definitions
ABC is a cost attribution to cost units on the basis of benefit received from indirect activities.
-- Cima Official Terminology
An activity is an event that incurs costs.
A cost object is defined as anything for which a separate measure of cost is desired/required.
An activity cost pool: The overheads cost allocated to a distinct type of activity or related activities.
A cost driver is any factor or activity that has a direct cause and effect relationship with the resources consumed.
Cost Unit: An item of production or a service for which it is useful to have cost information.
Cost accounting: The process of identifying, analyzing, summarizing, recording and
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