2. ABC is an accounting methodology that assign
cost(direct and indirect) to activities rather than
products and services that consume them.
The basic feature of ABC is its focus on
activities as the fundamental cost objects.It uses
activities as the basic for calculating the costs of
products and services.
CIMA Define “Cost attribution to cost units on
the basic of benefit received from indirect
activities e.g,ordering, setting up, assuring
quality”.

3.  The short-term variable costs should be identified
to products using volume related cost drivers such
as direct labour hour, direct material cost, machine
hour etc..
 Kalpan and cooper claimed that volume related
cost drivers are inappropriate for tracing log-term
variable costs to products because they are driven
by complexity and variety and not by volume and
the key understanding what cause (divers)
overhead costs in transactions undertaken by
support departments cost and factory overheads to
product lines under ABC system is shown in the
following figures:

5. Service Department Activity cost pools
& Product
lines
Factory overheads
Assigning costs of Application of cost
individual activities driver rates

6. Direct Labor
General Ledger
Payroll taxes XXX
Machine maintenance XXX
Purchasing Dept. labor XXX
Fringe benefits XXX Machine Hours
Purchasing Dept. XXX
Supplies
Equipment XXX
depreciation
Electricity XXX # of Purchase Orders
Unemployment XXX
insurance
Which overhead costs do you think are
driven by direct labor hours?

7. Direct Labor
General Ledger
Payroll taxes XXX XXXX
XXXX
Machine maintenance XXX XXXX
Purchasing Dept. labor XXX XXXXX
Fringe benefits XXX Machine Hours
Unemployment XXX
insurance
Equipment XXX
depreciation
Electricity XXX # of Purchase Orders
Purchasing Dept. XXX
Supplies
Overhead driver by direct labor
hours

8. Direct Labor
General Ledger
Payroll taxes XXX XXXX
XXXX
Machine maintenance XXX XXXX
Purchasing Dept. labor XXX XXXXX
Fringe benefits XXX Machine Hours
Purchasing Dept. XXX XXXX
Supplies XXXX
Equipment XXX XXXX
XXXXX
depreciation
Electricity XXX # of Purchase Orders
Unemployment XXX
insurance
Which overhead costs are
driven by machine hours?

9. Direct Labor
General Ledger
Payroll taxes XXX XXXX
XXXX
Machine maintenance XXX XXXX
Fringe benefits XXX XXXXX
Purchasing Dept. XXX Machine Hours
Supplies
XXXX
Equipment XXX
XXXX
depreciation XXXX
Electricity XXX XXXXX
Unemployment XXX # of Purchase Orders
insurance
XXXX
XXX
And finally, which overhead costs XXXXX
are driven by # of purchase orders?

10. Activities Drivers
Unit Level
Acquire and Use material for containers No. of Containers
Acquire and Use material for baby-care productsproducts
No. of
Batch Level
Set up manually controlled machines No. of batches of containers
Set up computer controlled machines No. of batches of B. Produst
Product Level
Design and manufacture moulds No.of moulds required
Use manually controlled machines Product type (containers)
Use conputer controlled machines Product type (B.Products)
Customer Level
Consult customers No. of consultations
Provide warehousing for customers No. of cubit feet
Faciltiy Level
Manage workers Salaries