Activity-Based Costing

Activity-Based Costing –ABC:

Costs attached to all activities, rather than goods. We have many examples for calculating the Activity-Based Costing or ABC but the most appropriate example is from SME based business activities which have variety of product to serve to its customers and they need to calculate the each activity cost.

Explanation with Example:

If we take the example of a burger point where the staff serving with two product burger and coca cola or Pepsi cola. The total production cost for both product is with raw material is PKR 58.00 they are paying the electricity and gas charges also for their operations to make the burger and to cool their fizzy drinks bottles. The extra cost of production of gas and electricity is 5 rupees as example we don’t know what is the electricity charges per unit WAPDA charging to their consumers and same for gas charges we have no information what the OGRA charging per cylinder now a days. That is the extra cost they are paying for their product and they need to adjust it in their production cost for that purpose they need to use the activity based costing technique. At this point we need to make a separation between this cost burger need the gas charges and the fizzy drinks needs the electricity charges. The Traditional way is to add the extra costs in the production cost and sell the product but that is not a good costing way we need to calculate the each activity based cost through the subjected method because many customers they just demand the burger and not like the fizzy drinks and some of them like the both with their meal for that purpose we give the weight to each activity according to its production or its carrying cost over their total production based.

According to this example and cost allocation to each activity after its per day production is showing that the business spending PKR 5.00/- amount per activity production and they are selling 100 burgers and 50 fizzy drinks bottles each day so that show us that their 66.67% activity is due to burgers and 33.33% is due to fizzy drinks so they will allocate PKR 3.33 to each bugger cost and PKR 1.67 for fizzy drinks carrying cost and then the total per unit cost of the burger is reach to PKR 48.33/- and fizzy drinks cost is PKR 21.67. That is the Activity based costing method which is very famous in cost accounting.

Comments

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