Answer:
ABC is the activity based accounting. It is the costing done for each separate activity which maybe unit level, batch level, product sustaining or facility sustaining.
Explanation:
The basic difference between ABC and traditional costing systems can be explained with the help of the following diagram.
Traditional Costing System
Overhead Cost Accounts (For each individual expense e.g. tax)
First Stage Allocation
- Cost Centers ( normally Departments)
- Cost Centers ( normally Departments)
N. Cost Centers ( normally Departments)
Second Stage Allocation ( Direct Labor Or Machine Hours)
Cost Objects ( products, services and customers)
ACTIVITY BASED COSTING SYSTEMS
Overhead Cost Accounts (For each individual expense e.g. tax)
First Stage Allocation ( resource cost drivers)
- Activity Cost Centers
- Activity Cost Centers
N. Activity Cost Centers
Second Stage Allocation ( activity cost drivers)
Cost Objects ( products, services and customers) (Direct Costs)
Four steps are involved in the design of ABC systems.
- identifying the major activities that take place in an organization
- assigning cost to cost pools / cost centers for each activity
- determining the cost for each major activity
- assigning the cost of activities to products according to the product's demand for activities.
The first two steps relate to the first stage and final two steps to the second stage of the two - stage allocation process shown above.
