Introduction to Activity Based Costing (Cambridge International A-Level Accounting)

Spec point — the application of activity based costing (ABC) what is meant by a cost driver

Introduction to Activity Based Costing

What is ABC costing?

• This type of costing uses the level of activity as the method to distribute the overheads
• This costing methods suits a manufacturing business that has a lot of production activities
• The level of activity is linked to the cost drivers

What is a cost driver?

• These are the main activities that change the cost of production (this could be for a unit or batch production)

• These are typically grouped as follows:

  • Number of machine set up's
  • Number of quality inspection's
  • Number of transfers
  • Number of orders
  • Number of batches

What is a cost pool?

• The cost drivers or the activities are grouped together in a pool

• Similar activities will be put in the same cost pool

  • For example, resetting the machine and cleaning the machine costs will be put into one pool -"Machine set up" cost