ABC Costing Process

ABC Costing Process

ABC is a costing method, in which costs may be allocated on the bases of different activities which are responsible for that cost. This activity not necessarily required to be a production activity.

1.    Identification of activities

First step of activity based costing is to identify the all activities which generate cost. This is a complex process and requires a lot of business knowledge and experience.

2.    Allocate Cost to activities

Second step of activity based costing is to allocate cost to identified activities. It means every identified activity is a cost pool or cost center. All cost related to that activity (cost center) is accumulated.

3.    Different Absorption Rate

Third step is to calculate separate absorption rate for each activity. These rates are used to charge cost of activities to the production. Charging criteria is level of activity utilized by the production or other department