Activity based costing

Abstract

In recent years, the traditional methods of cost calculations have come under severe criticism, in part because of their orientation to financial accounting and their too simplistic allocation of overhead costs. Activity Based Costing (ABC) offers an alternative that is being implemented by an increasing number of enterprises. The major renewal of the ABC system consists of analyzing overhead costs in more detail and allocating them more precisely. This is done by dividing the enterprise process into activities and by identifying the most important costgenerating factor or factors for each activity. The costs are first allocated to activities and then to products and services on the basis of these cost-generating factors. In this introductory article, the principles of the operation of the ABC system are examined and a comparison is made with the traditional systems. Attention is also devoted to the Activity Based Management System, the objective of which is the optimum functioning of the enterprise process.