Activity based costing

In this lesson

1. 0:00 Activity-Based Costing overview
2. 1:01 ABC versus Absorption Costing
3. 3:41 Understanding cost drivers
4. 5:32 Five steps of ABC explained
5. 6:59 Step one and two: Grouping overheads and identifying drivers
6. 8:12 Step three: Calculating overhead absorption rates
7. 12:52 Step four: Absorbing costs into products
8. 16:20 Step five: Calculating cost per unit
9. 18:49 Cost driver definition and MCQ

About this lesson

This video walks you through the five-step ABC process: grouping overheads into cost pools, identifying relevant cost drivers, calculating separate overhead absorption rates, absorbing costs into products, and determining the final cost per unit. Understanding ABC is essential for Performance Management and cost accounting modules, as it helps you make better-informed decisions about product pricing and profitability by reflecting the true complexity of production. The session contrasts ABC with traditional Absorption Costing, showing why matching costs to their actual causes matters. You'll see how different activities—such as machine setups, material movements, and quality inspections—each have their own cost driver, and how to apply these drivers to allocate overheads fairly across products. Through worked examples, you'll practise identifying cost drivers from question language, calculating overhead absorption rates for each activity, and building up to a complete cost per unit that includes direct materials, labour, and activity-based overheads. By the end, you'll be confident applying ABC to exam questions and understanding why some products consume more overhead resources than others.

Duration: 20m