Abc Costing

ABC Costing is a supplemental method of cost accounting that provides the decision-making information absent from traditional costing methods. While ABC costing is not limited by business unit boundaries, it can not fully supplant traditional costing methods as it often fails to meet financial reporting requirements for businesses.

ABC Costing focuses on costs contributing to production of a product. It does not attribute other general costs that do not have at least an indirect relationship to the product. While traditional costing systems focus on direct costs and burden a product with other fixed costs, activity based costing increases accuracy of indirect cost assignment.

In their 1999 book, Managerial Accounting, Garrison and Noreen identify six core steps to ABC costing implementation.*

Implementation Steps

Step #1: Activity Identification

First, activities must be identified and grouped together in activity pools. Activity pools are the supporting activities that tie in to a product line or service These pools or buckets may include fractionally assigned costs of supporting activities to individual products as appropriate during the second step.

Step #2: Activity Analysis

ABC continues with activity analysis, clearly identifying the processes which support a product and avoiding some of the systemic inaccuracies of traditional costing. ABC costing requires activity analysis, similar to the process mapping found in lean manufacturing.

This activity analysis identifies indirect cost relationships and allows assignment of some percentage of that activity to an end product directly.

Step #3: Assignment of Costs

Based on the findings of step #1 and #2, costs are assigned to an activity pool. For example, human resources costs would be assigned to indirect administrative or indirect management costs. These pools will each have some contribution to object cost.

Step #4: Calculate Activity Rates

Initial analysis may include direct labor hours, or...