ABSTRACT

Activity-based costing (ABC) approaches a strategy based on a customer’s needs and the competition between various services of a company. ABC costing uses a different method of allocating indirect costs. It assigns direct costs to specific production units, and indirect costs based only on direct labor hours or the volume of production. Cost objectives can be classified as final cost or interim cost objectives. Interim cost objectives are accumulated costs charged elsewhere within the company, such as tooling costs used to manufacture products, and are accumulated and later capitalized and amortized. Such decisions as a cost-flow diagram, distribution bases, and a series of worksheets and schedules must be developed for the organization. Product/customer support activities are also applied directly to those specific cost objectives and are distributed using such basis as unit cost and percentage of conversion cost. By identifying cost drivers, costs can be assigned to activities and activities to products.