ACTIVITY-BASED COSTING
An organisation so as to be to comply with financial reporting requirements, the traditional cost accounting system is closely linked to its general ledger system. This in particular has to do with cost allocation. Mostly, costs are accounted either for valuation (i.e., financial statements analysis) or decision-making activities (i.e., internal purpose) or both. Meanwhile, sometimes the costs are accounted for reimbursement purposes (e.g., corporate health insurance, corporate travel). The traditional approach to cost-allocation manages three sequence of actions: a) Accumulate and account costs within a production or nonproduction business area, b) Allocate nonproduction business area costs to production business area, and c) Allocate the resulting (revised) production costs to various products, services, or customers.
Costs hence derived using traditional allocation approach suffers from some defects that can result in incorrect costs for decision-making purposes. For example, the traditional approach attributes the cost of idle position to systems. Accordingly, such costs are recharged to entities that did not use it. In order to find solution to such anomalies, many organisations have adopted a separate cost-allocation methodology called Activity Based Costing (ABC).
WHAT IS ACTIVITY BASED COSTING?
In contrast to traditional cost-accounting framework, ABC framework first accumulate overhead costs for each organizational activity, and then assign the costs of the activities to the products, services, or customers (cost objects) causing that activity. As we can imagine, the most critical aspect of ABC is activity analysis. Activity analysis is the processes of discovering appropriate measures and resources (cost drivers) and their influence on the costs of creating a product or providing a service. Activity analysis