Method of Activity based costing

In Financial Management, the method of ABC (Activity Based Costing) is an alternative to traditional financing methods against the top of the overhead costs. This concept arises because it is considering inappropriate in the traditional method of allocating overhead costs to production only by relying on basic materials directly, direct wage or production units only.

According to this concept the imposition of such unfair and will be able to provide information regarding the information stumble in awarding costs of production, therefore ABC offers so that the overhead of loading is also base on the percentage of the proportional to other charges or to the product.

But to the activities undertaken to produce it, the note is the element that men "drive" it costs (cost drivers) instead of its products. If this concept is applying, then the decisions taken would be appropriate and the company suffer no harm just because the unit cost.

Understanding the method of ABC (Activity Based Costing)

Definition of activity-based costing  is a cost method that first assigns costs to activities and then assigns them to product base on the product consumption of activities.

Another Definition is ABC is method of product costing that focus on the activities perform to produce a product. It then assigns the cost of activities to product by using cost drivers that measure the activities perform.

So the ABC (Activity Based Costing) is a system of accumulation of fees and the imposition of cost to products by using various cost drivers, done by tracing the cost from activity and after that browse cost from activity to the product.

The benefits and limitations of the method ABC

1. Determine the prices of staple products more accurately, especially to eliminate cross-subsidies. So no more loading the price of the staple of a certain kind of too high (over costing). The cost of goods to other types of products is too low (under costing).


2. Improve decision making. By using the ABC not only presents a more accurate information about the cost of the product. But also provide information for managers on activities. That cause the onset of costs in particular indirect costs. Which It is important for management in good decision making regarding products or managing activities. So as to increase the efficiency and effectiveness of the effort.


3. Increase the control overhead costs. Overhead costs cause by activities that occur in the company. The ABC system makes it easy for managers in controlling the activities that cause the overhead costs.

Limitations of ABC are:

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   1. The ABC system requires data that are collect by an unusual company, such as the number of set-up, the number of inspections, the number of orders receive.

• On the ABC factory overhead costs are allocate, such as insurance costs and depreciation cost of factory activity centers to more accurately is difficult because of the increasing number of number of Centre activity center.

ABC stages

The stages in the implementation of the ABC is as follows:

• Identify activities Identification activities requires the existence of a list of the types of work. That is contain in the company with regard to the production process.


• Charge to the activities each time an activity is define. Then the cost of implementation of those activities.


• Determine the activity driver the next step is determining the activity driver for each activity. Which is a governing factor of such activities.


• Determine the rate in determining these rates. The total cost of each activity is divide by the total activity of drivers use for the event.


• Charge to multiplying the next step is the rate earn for each of those activities with the activities of drivers. That is consume by each product type which was produce. Then share them with the number of units produce for each product.