Stages in Developing Activity Based Costing System

Step 1: Identify Resources

Resources represent the expenditure of an organization. These are the same costs that are represented in a traditional accounting, ABC links these cost to products, customers or services.

Step2: Identify Activities

Activities represent the work performed in an organization. ABC accounts for the costs based on what activities caused them to occur. By determining the actual activities that occur in various departments it is then possible to more accurately relate these costs to customers, products and services.

Step 3: Identify Cost Objects

ABC provides profitability by one or more cost object. Cost object profitability is utilized to identify money-losing customers to validate separate divisions or business units. Defining outputs to be reviewed is an important step in a successful ABC implement action.

Step 4: Determine Resource Drivers

Resource drivers provide the link between the expenditure of an Organisation and activities performed within the Organisation.

Step 5: Determine Cost (Activity) Drivers

Determination of cost drivers completes the last stage of the model. Cost drivers trace or link the cost of performing certain activities to cost objects.

Activity Cost Driver Rate =    Total Cost of Activity (Cost pool)

Activity Cost Driver

Step 6: Assign Costs to the Cost Objects

We can use following formula for assigning costs to the cost objects

Costs = Resources Consumed × Activity Cost Driver Rate