Activity based costing

In this lesson

1. 0:00 Alternative costing principles overview
2. 2:00 Activity-Based Costing introduction
3. 3:23 ABC versus Absorption Costing explained
4. 4:27 Identifying activities and cost drivers
5. 7:15 ABC implementation approach
6. 9:13 Advantages and disadvantages of ABC

About this lesson

Rather than allocating overheads by department, ABC breaks the business down into specific activities—such as ordering materials, equipment setup, and product inspections—and assigns costs based on cost drivers: the factors that actually cause those costs to occur. This approach gives you far more accurate product costs, especially in complex manufacturing environments where different products place very different demands on the business. You'll explore the practical steps: identifying major activities, determining the appropriate cost driver for each one, creating cost pools of related overhead costs, and then calculating a rate per cost driver to charge to your products. The video covers the real advantages of ABC—it's logical, versatile, and more accurate than traditional methods—alongside its practical drawbacks: it's more complex, time-consuming, and requires careful selection of cost drivers to avoid distorting your results. While some organisations like Chrysler have used ABC very successfully, others have abandoned it when the benefits didn't justify the extra effort and resources required. At this stage, you're building knowledge of how ABC differs from Absorption Costing and understanding when and why it's used. You'll work through the numerical calculations and detailed applications later in your management accounting studies.

Duration: 11m