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Activity Based Costing

Activity Based Costing is the new approach of cost accounting. Under the Activity Based Costing costs are first found out to the activities and then to products. It focuses on activities performed to produce products.

Under the traditional costing, there is an absence of appropriate basis of allocation of cost and that should be left to the decision of the cost accountant to select appropriate basis for allocation. In accurate cost information, thus provided by the traditional costing, methods may lead to v.>rong decisions if used for control purposes or determination of selling price. Professor Vipul pointed out, “Activity Based Costing had its genesis in the increasing importance of indirect Costs in the manufacturing operations. The direct processing costs which are easier to handle are being relegated to the background with each passing day due to automation. In this modern scenario, where indirect costs for outweighing the direct processing costs in many a situations, one cannot be content with rough and ready methods of yester years in dealing with the indirect costs.”

The present industrial organisation follows an advanced manufacturing technology in the allocation. Because the traditional costing system will not be suitable for the present high tech manufacturing industries. The CIMA official Terminology defines Activity Based Costing as “Cost attribution to cost units on the basis of benefit received from indirect activities e.g., ordering, setting up, assuring quality”.