Activity based costing is the method or system of adding indirect costs to products which involves to finding cost of each activity involved in the production process . And it’s assigning costs to each product based on its consumption of each activity.
Activity based costing is a more refined approach to costing products and services than the regular traditional costing methodology It involves with all the following steps:
Identification of all activities which involved on production
Classification and defining each activity according to the cost hierarchy
Identification of total costs of each activity;
Identify the most appropriate cost driver for each and every activity;
Calculate total units of cost driver which is relevant to each activity;
Calculate of the activity rate the cost of each activity per unit of its relevant cost driver;
It helps to applicable the cost of each and every activity to products based on it’s activity used by those products.