Step 1: Identify Resources
Resources represent the expenditure of an organization. These are the same costs that are represented in a traditional accounting, ABC links these cost to products, customers or services.
Step2: Identify Activities
Activities represent the work performed in an organization. ABC accounts for the costs based on what activities caused them to occur. By determining the actual activities that occur in various departments it is then possible to more accurately relate these costs to customers, products and services.
Step 3: Identify Cost Objects
ABC provides profitability by one or more cost object. Cost object profitability is utilized to identify money-losing customers to validate separate divisions or business units. Defining outputs to be reviewed is an important step in a successful ABC implement action.
Step 4: Determine Resource Drivers
Resource drivers provide the link between the expenditure of an Organisation and activities performed within the Organisation.
Step 5: Determine Cost (Activity) Drivers
Determination of cost drivers completes the last stage of the model. Cost drivers trace or link the cost of performing certain activities to cost objects.
Activity Cost Driver Rate = Total Cost of Activity (Cost pool)
Activity Cost Driver
Step 6: Assign Costs to the Cost Objects
We can use following formula for assigning costs to the cost objects
Costs = Resources Consumed × Activity Cost Driver Rate
