Under ABC costs are driven by activities and not production volume. Typical overheads which are NOT driven by production include the following:
§ Setup costs – driven by the number of manufacturing setups.
§ Order processing costs – driven by the number of orders.
§ Packing department costs – driven by the number of packing orders.
§ Engineering department costs – driven by the number of production orders.
§ Air conditioning maintenance – number of air conditioning units
1.4 calculating costs per driver and per unit using ABC
There are five basic steps in establishing and applying a system of ABC:
Step 1 Identify activities that consume resources and incur overhead costs.
Step 2 Allocate overhead costs to the activities that incur them. In this way, each identified activity becomes a cost pool for overhead costs. It is important that overhead costs should be directly allocated to a cost pool. There should not be any arbitrary apportionment of overhead costs.
