The chartered institute of management accountants defines activity-based cost management as follows: "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."

ABC is the activity based accounting. It is the costing done for each separate activity which maybe unit level, batch level, product sustaining or facility sustaining.

Explanation:

The basic difference between ABC and traditional costing systems can be explained with the help of the following diagram.

Traditional Costing System

Overhead Cost Accounts (For each individual expense e.g. tax)

First Stage Allocation

N.  Cost Centers ( normally Departments)

Second Stage Allocation ( Direct Labor Or Machine Hours)

Cost Objects ( products, services and customers)

ACTIVITY BASED COSTING SYSTEMS

Overhead Cost Accounts (For each individual expense e.g. tax)

First Stage Allocation ( resource cost drivers)

N. Activity  Cost Centers

Second Stage Allocation ( activity cost drivers)

Cost Objects ( products, services and customers) (Direct Costs)

Four steps are involved in the design of ABC systems.

The first two steps relate to the first stage and final two steps to the second stage of the two - stage allocation process shown above.

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