Activity Based Costing

Cost allocation based on idenfitying the cost drivers that contribute to the creation of the costs is growing as a costing philosophy. The intent is to identify the cost drivers contributing to the creation of indirect overheads and then align these drivers to specific products and services. In this way indirect overheads are associated with specific products and services. This approach also supports creation of product  / service contribution and profitability statements.  

macs Activity Based Costing involves the following steps:

• Process and Activity Analysis
  • The activities and processes performed in the general services departments (sales, admin etc) need to be defined and grouped in hierarchical fashion. This allows for sub-processes across several cost centres to be grouped in a common node.
• Allocate Costs to Processes
  • Every cost is assigned to an activity/process according to the process that incur the cost
• Define Cost Drivers
  • Cost drivers are then defined and assigned to the processes. The magnitude of these cost drivers per process will then determine the cost for a certain process. E.g The process “Foreign Order Processing” could have a cost driver being the processed orders
• Process Quantity Determination
  • Determine the magnitude of the cost drivers E.g the number of orders to be processed. In the beginning phases these drivers are often estimated
• Calculate a Process Cost Rate
  • Determine the cost of a unit of a single process.
• Final Process Cost Calculation

  • Assign the processing costs to products/service. For this purpose a Process Plan is created. A Process Plan is an aggregation of different processes to be assigned to the products or product group. E.g. Foreign Order Processing and Overseas Marketing are assigned to Product Group “Export Products”