Home page     Downloads      Privacy policy     Disclaimer & terms of use     Contact us     Advertise with us     About us      Link to us

Home Activity Based Costing System Definition and Explanation of Activity Based Costing System

Definition and Explanation of Activity Based Costing System:

Learning Objectives:

  1. Understand activity based costing system.
  2. How it differs from a traditional costing system?

Activity based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore "fixed cost".

Activity based costing system is used to determine product costs for special management reports. This system is ordinarily used as a supplement to the company's usual costing system. Most organizations that use ABC system have two costing systems--the official costing system that is used for preparing external financial reports and the activity based costing system that is used for internal decision making and for managing activities.

In traditional cost accounting systems, the objective is to value inventories and cost of goods sold for external financial reports in accordance with the generally accepted accounting principles (GAAP). In activity based costing (ABC) system the objective is to understand overhead and the profitability of products and customers and to manage overhead. As a consequence of these differences in objectives, "best practice" activity based costing system differs in a number of ways from traditional cost accounting.

In activity based costing:

  1. Non-manufacturing as well as manufacturing costs may be assigned to products.
  2. Some manufacturing costs may be excluded from product costs.
  3. A number of overhead cost pools are used, each of which is allocated to products and other costing objects using its own unique measure of activity.
  4. The allocation bases often differ from those used in traditional costing system.
  5. The overhead rates or activity rates may be based on the level of activity at capacity rather than on the budgeted level of activity.

These differences from traditional cost accounting systems can dramatically impact the apparent costs of products and the profitability of products and customers.

You may also be interested in other relevant articles from "activity based costing system" chapter:

  1. Definition and Explanation of Activity Based Costing System
  2. Treatment of Manufacturing, Non-manufacturing and Idle Capacity Costs Under Activity Based Costing System
  3. Activity Based Costing And Top Management
  4. Activity Based Costing System and External Reports
  5. Designing and Implementing Activity Based Costing System
  6. Targeting Process Improvements (Activity Based Costing + Activity Based Management)
  7. Advantages or Benefits | Disadvantages or Limitations of Activity Based Costing System
  8. Activity Based Costing Example


Downloadable Materials

Learn Accounting Easily With AccountingCoach Pro

View Online or Download all of the materials to Your Computer and Print Immediately

What is Included in Accounting Book
Downloadable Self-Study Materials ( Available in Word Editable Format)
Help in preparation of Online Exams (Available in Word Editable Formatt)
Solved Accounting Problems
Bookkeeping and Financial Statements

Back to Home Page | Back to Activity Based Costing System Page

Managerial Accounting

Introduction to Managerial Accounting
Business and Quality Improvement Programs
Cost Terms, Concepts and Classification
Job Order Costing system
Process Costing System
Process Costing System - Addition of Materials & Beginning Inventory
Controlling and Costing Materials
Materials and Inventory Cost Control
By Products and Joint Products Costing
Variable Costing System
Activity Based Costing System
Budgeting and Planning
Standard Costing and Variance Analysis
Gross Profit Analysis
Linear Programming Technique
Segment Reporting and Transfer Pricing
Capital Budgeting Decisions
Service Department Costing
Cash Flow statement
Financial statement Analysis
Pricing Products and Services
Managerial Accounting Terms and Definitions
Managerial / Cost Accounting Formulas

Financial Accounting

Bookkeeping and Bookkeeping Terms
Accounting Principles and Accounting Equation
Accounting For Bills of Exchange
Subdivision of Journal
Final Accounts
Capital and Revenue Items
Single Entry System/Accounting From Incomplete Records
Accounting For Non-Trading Concerns
Accounting for Consignment / Consignment Accounts
Accounting for Joint Ventures
Accounting for Depreciation

About us !

Also see formula of gross margin ratio method with financial analysis, balance sheet and income statement analysis tutorials for free download on Accounting4Management.com.Accounting students can take help from Video lectures, handouts, helping materials, assignments solution, Online Quizzes, GDB, Past Papers, books and Solved problems. Also learn latest Accounting & management software technology with tips and tricks.

Home page   Download Material   Privacy policy   Disclaimer & terms of use   Contact us   Advertise with us   About us   Useful links   Link to us

Copyrights of all content on this web site are owned by Accounting For Management except where indicated in source or copyright statements. Accounting For Management must be contacted for permission to copy or redistribute any material published on this website.
Copyright 2014 Accounting For Management. All rights reserved.