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  Terms of Activity Based Costing

Significant Terms used in Activity Based Costing

1. Cost Objects

 Usually, the products are cost objects, but the customers, services or locations can also be the cost objects.

2. Activities.

These contain the aggregate of dissimilar tasks and are related with functions related with cost objects. There are 2 types of activities-

(A) Support activities,

(B) Production process activities.

Support activities are, schedule production, purchase materials, set up machine, inspect items, supplier records, customer orders, etc. within the production process activities machine products and assembled products are involved. Activity cost centres are, occasionally, identical to cost centres employed within traditional costing system. In case the purchasing activity and purchasing department both are considered as cost centres, the support activity cost centre also turns into similar to cost centre taken within traditional costing system.

Cost Pool.

It is other name given to a cost centre and, so an activity cost centre might also be known as an activity cost pool.

Cost Drivers.

The reasons for incurrence of overhead cost are termed as cost drivers. A cost driver is a factor the alteration of which results in an important change in the total cost of a associated object.

Following are some of the instances of cost drivers :

1. Machine Setups                                   7. Maintenance requests

2. Purchase orders                                   8. Machine time

3. Quality Inspections                               9. Power consumed

4. Production orders (Scheduling)               10. Kilometres driven

5. Material Receipts                                  11. Beds occupied

6. Inventory movements                           12. Flight-hours logged

The activity cost drivers can generally be categorized into following three categories:

A. Transaction drivers.

For instance, the customer orders processed, purchase orders processed, inspections performed and the set-ups take on, all count the number of times an activity is take place.

B. Duration drivers.

Mean the amount of time needed to perform an activity. Instances of duration drivers are set-up hours and inspection hours.

C. Intensity drivers.

Consider to drivers that directly charge for the resources employed each time like activity is performed. Duration drivers set up an average hourly rate of performing an activity when intensity drivers include direct charging relies on the actual activity resources applicable to a product.

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