Summary
Chapter 07 Activity-based costing: A tool to
aid decision making
Submitted to: Sir Ameet Kumar
Submitted by: Aamir ali chandio
Activity-based costing is used by top companies such as coca cola and citiGroup. It provides them with
the cost information for making decisions. Previously, we used absorption costing, which divided
specifically the manufacturing overhead. While ABC also includes nonmanufacturing costs with are
traceable to individual products such as shipping cost and salesman commission. It this system
nonmanufacturing as well as indirect manufacturing costs are termed as Overhead costs.
Traditional absorption costing spread capacity irrespective of the use while activity-based costing spread
costs based on used capacity such as if producing a soap does not only used labors but machines and
admin. If they are used in producing the soap it would be treated in ABC. While traditional absorption
method simply assumes at all.
ABC has five levels of activities including unit-level, batch level, customer-level, product-level and
organizational level. Taking the example of producing a bulb. Providing power supply for the production
(unit-level), number of order and placing to the customers of bulb (batch-level), designing a bulb
relevant costs and costly maintaining two reports for external and internal.