Activity based costing steps
Building an model involves a number of steps. The purpose is to cost products and services as realistically as possible based on all the resources required to support the Activities necessary to produce the cost objects
Activity based costing steps in ABC Focus
ABC Focus is a software solution based on activity based costing methodology. In ABC there are six distinct aspects to the costing.
The cost objects are things like products or services from which income is derived. These items are sold at a price which in order to make a profit must be higher than all the costs involved in making them marketable commodities.
The cost object is the end product. In the background there are multiple Activities using Resources and incurring costs necessary to produce these Cost Objects. So on the one hand there are the cost objects that are income producing. On the other hand are all the Activities that use the Resources and incur the costs. Activity based costing steps match up these two.
Remember it is the activities that use the resources so one needs to determine what the firms activities are. The Activities of the organization are the Cost pools. The Resources these cost pools use ie the cost of the resources such as materials, expenses, and people are the Cost lines. For both Activities and Resources there is something that triggers their need or drives their usage. With Activities this trigger is known as the Cost driver and with Resources its the Resource driver. Therefore to build a costing model you must know what Objects you want to cost, which Activities and Resources make these objects and how the Drivers influence their usage.
Basic activity based costing steps and beyond
The basic steps are the determination of the entities Cost objects, Cost lines and Cost pools together with their Drivers. With ABC Focus costs can be fed via Tertiaty pools to Secondary Pools then Primary pools en route to the Cost Object. This software solution allows for the allocation of Revenue to Cost Objects to ascertain profitability based on full cost allocations.
There are optional extra steps for those interested in eg
Costing Composite cost objects which are mixes of costed objects
Including Capital investment costs to enable capital analysis
Budgeting based on Activity outputs rather than the traditional % cost increase.