What are the steps of the establishment of a system of costs by activity?

The steps in the implementation of a system of costs per activity are:

• Identify activities that consume resources
• Determine and allocate all direct costs to cost objects
• Determine resource drivers to share out the indirect costs to each activity
• Determine activity drivers to link the costs of activities to cost objects
• Identify and share out all indirect costs for each activity
• Calculate unit costs of activities (or activity imputation rate)
• Calculate total activity costs charged to the cost object
• Use of activity costs for decision making

The concept of cost object is a useful concept to identify and track costs.

Examples of cost objects are :

• cost of a specific product or service
• costs incurred by a department or responsibility center
• costs incurred in a specific operation or activity
• costs incurred by a particular contract.

Activity-based costing is more refined approach to costing products and services than the traditional costing method. It involves the following steps: Identification of activities involved in the production process; Classification of each activity according to the cost hierarchy (i.e. into unit-level, batch-level, product level and facility level); Identification and accumulation of total costs of each activity; Identification of the most appropriate cost driver for each activity; Calculation of total units of the cost driver relevant to each activity; Calculation of the activity rate i.e. the cost of each activity per unit of its relevant cost driver; Application of the cost of each activity to products based on its activity usage by the product.

agreed with mr. vaiyapuri.............

Agree with expert ansewrs above

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Thanx for the invitation

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