Characteristics of Activity Based Costing
- Simple traditional distinction made between fixed cost and variable cost is not enough guide to provide quality information to design a cost system.
- The more appropriate distinction between cost behaviour patterns are volume (scale) related, diversity (scope) related, events (decisions) related and time related.
- Cost drivers need to be identified. A cost driver is a structural determinant of cost related activity. The logic behind is that cost drivers dictate the cost behaviour pattern. In tracing overhead cost to product, a cost behaviour pattern must be understood so that appropriate cost driver could be identified notesstudy.com.
Key Areas of ABC:
Following are the three key areas of ABC:
- Product cost differentiation.
- Activities and their cost drivers.
- Identification of non-value added cost.
In ABC system a cost center is established for each cost driver and identification, measurement and control of cost drivers is essential in ABC. ABC is the planned and systematic study and determination of cost of each of the branches of business activities that add to the value of product and services.