Activity Based Costing

What is Activity Based Costing?

Due to the increase in the difficulty of process for several business organizations or companies, example manufacturing, the conventional approach of absorption costing, it is said that it is inappropriate because this concept or approach includes finding out a direct relation and distributing accurately, generally on the basis of  volume of the good of that business organization. Which means a slight fluctuation in the labor could lead to a big change in distribution of costs.

In the year 1988, Robert S. Kaplan and Robin Cooper from the Harvard Business School, formulated the ABC (Activity Based Costing) for the product in the manufacturing business or industry as an option to the absorption costing system, in order to provide a greater and clear insight into allocating cost. It has been proven to provide important improvements over the conventional approach.

ABC or Activity based costing is designed for the following purposes:

• Identifying the major activities that take place in organizations.
• Assigning costs to activities
• Selecting appropriate cost drivers for assigning costs(how to allocate activities)
• Assigning cost of activities to products.

It is based not just on a single driver as absorption cost, so it goes more in-depth into each cost that has occurred and subsequently into how to allocate them more efficiently.

There are several advantages of using ABC costing. It will give management an insight into the product costs, which they did not have any measures in previous times. An ABC system gives a view into how efficiently resources could be utilized and how all the company’s activities or operations  contribute to the cost of service or product, as a result, the university could target profitable products i.e. profit from undergraduate degree courses and examine where and how it needs to cutback costs.

Questionnaire:

• What is ABC?
• Give the importance of Activity Based Costing?