Question

ABC Company uses a traditional costing system. Management is considering switching to an activity-based costing system. What steps must Star take in initiating an activity-based costing system?

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Answer 1

Steps, ABC Company must take for initiating Activity Based Costing:

Step1: Identification Of Activities:

In this step all the activities of organisation are identified including the primary activities & support activities.

Step2: Calculating activity cost pool:

For each activity identified in step1, we must calculate activity cost pool i.e., the total cost of that activity.

Step3: Identification of cost drivers:

For each activity, we must identify the cost drivers. Cost drivers means the factors that cause the activities to be performed. They are the factors which influence the activity. Change in cost drivers result in change in cost of an activity.

Step4: Calculate cost driver rate:

Cost driver rate= Total activity cost pool/Total number of activity cost drivers.

Step5: Assigning the costs to the cost objects:

Here we have to charge the cost to the product or to the customer.

overhead charged = Number of cost drivers consumed*Cost driver rate

Once we get the total overhead charged then we can calculate overhead per unit also.

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