Section 6 of 8
Activity-based costing (ABC) — a costing method that charges overheads to products on the basis of the activities that drive those costs, using multiple cost drivers rather than a single volume-related rate.
CIMA definition: "An approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs; resources are assigned to activities, and activities to cost objects based on consumption estimates."
| Term | Meaning |
|---|---|
| Cost pool | A group of overhead costs caused by the same activity |
| Cost driver | The factor that causes the cost in that pool (e.g. number of batches, number of inspections) |
| Cost driver rate | Cost pool total ÷ total number of the cost driver |
| Cost pool | Typical cost driver |
|---|---|
| Machine set-up costs | Number of batches / set-ups |
| Quality control / inspection | Number of inspections |
| Material handling / stores | Number of purchase orders or stores requisitions |
| Machine running costs | Machine hours |
| Customer order processing | Number of customer orders |
| Product design | Number of design changes |
Traditional absorption costing uses a single volume-related driver (e.g. labour hours). This was acceptable when:
Modern manufacturing has changed:
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