![]() In ABM however, it is recognised that the cost of a particular activity may depend on something other than volume of output. In traditional costing, it was always assumed that the cost driver was volume of production, measured either in terms of the number of units, or a proxy, such as the number of labour hours or the number of machine hours. ![]() ![]() The cost driver is the factor that causes the cost of an activity to vary. In the case of ABC however, it is then necessary to apportion the costs of each activity to the products using the cost driver information. This is similar to the principle of allocating and apportioning costs to cost centres in traditional absorption costing.Īs far as ABM is concerned, simply having the information about the cost of each activity may be all that is required. Other costs such as rent and heating and lighting will also have to be apportioned. Staff may be asked, for example, to estimate how much time they spend on each of the activities above so that factory staff costs can be apportioned to the relevant activities. The following list shows examples of some of the activities that may take place in a manufacturing organisation:Īll indirect costs must be apportioned to the particular activities that they relate to using an appropriate basis. These activities may be summarised in an activity dictionary. Some organisations may try to define only high-level activities to keep the number of activities defined to less than 30, while other organisations may define much more detailed activity lists. It would not be feasible, or even beneficial, to identify every activity that the organisation performs – so judgment will need to be used to identify the significant activities perhaps based on the amount of time that is spent performing them or based on the expected cost. Organisations perform hundreds, if not thousands, of different activities. Identify the activity cost driver for each activity.Identify the activities that the organisation performs.The initial stages in ABM are the same as for ABC, so these should be familiar from earlier studies: The aim is to achieve the same level of output with lower costs. However, it soon became apparent that the information that had been produced for activity based costing had much wider use than just calculating the cost per unit of a product or service.Īctivity-based management (ABM) can be defined as the entire set of actions that can be taken on a better informed basis using ABC information. The aim of these was to achieve a more accurate calculation of product costs. An introduction to professional insightsĭuring the 1980s, many businesses started to introduce activity-based costing (ABC) systems.Virtual classroom support for learning partners.Becoming an ACCA Approved Learning Partner.Resources to help your organisation stay one step ahead.
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