Activity Based Costing

            Costing is a major role in managerial accounting. Cost information is necessary for the management to perform management functions like planning, directing and controlling. .
             Traditional methods of costing classified the manufacturing costs into three categories: Direct materials, indirect materials and Manufacturing overhead. Direct material and direct labor costs can be allocated to products easily. However, calculating the overhead cost for the products is difficult and may not be accurate. Overhead costs are generally applied using a weighted average for the products.
             Activity Based Costing (ABC) is a new costing approach used to calculate the overhead costs for products. ABC allocates over head costs per activity used in generation of the product/service. ABC gives a more accurate cost per product than traditional costing methods. "ABC generates more accurate cost and performance information related to specific products and services than is available to managers through traditional cost accounting approaches." [5]. ABC helps the management in making informed decision due to the accuracy in product costs. .
             The steps involved in ABC are [8].
             a) Analyzing Activities.
             b) Gathering Costs.
             c) Tracing Costs to Activities.
             d) Establishing Output Measures.
             e) Analyze Costs.
             The names of the steps can be different from organization to organization. However, the basic framework for ABC is similar to the one mentioned above. The objective is to differentiate the costs per each activity.
             Analyzing Activities:.
             This step involves identifying the activities that are required for generating the output which might be a consumable product or a service. The identification of these activities needs a thorough understanding of the system [3]. Activities are then differentiated as Value added or Non value added. Value added activities are those that help in enhancing the quality of the output in customer's perspective. The Non value added activities might appear to be of no use to the customer; however, they might be useful to the management and the organization in providing better products/services.