ABC Activities Identification

ABC Activities Identification

1.    Activities Generate cost

All activities which are responsible for creating or generating cost are identified. These activities include production process, material handling, etc. it is important that all major cost generating activity are identified, otherwise, this costing will not work.

2.    Production is key area

It is important to remember that production will remain the key area for identifying the activities. Many activities would be relating to production. However, some activities may fall outside the production area.

3.     Number of activities

A reasonable number of activities will be identified to cover all the cost. What is the reasonable number, it depends on the nature of business. General criteria are to identify all major activities which are responsible for major costs.

4.    Too many activities are complex

Identifying too many activities will make the absorption process complex and time consuming. It would be difficult to use too many cost centers for accumulation of cost and then absorption of such accumulated costs.

5.    Too little activities will not cover the cost

Identifying too little activities will not cover the cost and therefore purpose will not be served. Business knowledge and experience of the business and industry is key factor for deciding right number of activities