Outline of an ABC System
An ABC costing system operates like given:
Step 1
Find out an organization's major activities.
Step 2
Find out the factors that identified the size of the costs of an activity/cause of the costs of an activity. These are identified as cost drivers. See at the given examples:
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Activity
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Possible cost driver
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Ordering
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Number of orders
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Materials handling
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Number of production runs
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Production scheduling
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Number of production runs
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Dispatching
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Number of dispatches
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For those costs that vary along with production levels in the short term, ABC employs volume-related cost drivers as like machine or labour hours. The cost of oil employed a lubricant on the machines would hence be added to products on the basis of the number of machine hours as oil would have to be employed for each hour the machine ran.
Step 3
Collect the costs of all activity into what are identified as cost pools or equivalent to cost centers beneath more traditional costing methods.
Step 4
Charge support overheads to products upon the basis of their usage of the activity. A usage of usage of an activity is measured via the number of the activity's cost driver it generates.