Terminology of Activity Based Costing

A Cost Object: It is an item for which cost measurement is required e.g. Product, job or a customer.

  • A Cost Driver: In an ABC system, the allocation bases that are used for applying costs to services or procedures are called cost drivers. It is a factor that causes a change in the cost of an activity. Few examples of cost driver as under:
  • Unit level cost: Traditionally, cost drivers were viewed only at the unit level. These drivers create unit-level costs meaning that they are caused by the production or acquisition of a single unit of product or the delivery of a single unit or service.
  • Batch level cost: Costs are caused by a group of things being made, handled or processed at a single time are referred to as batch level costs.
  • Product-level cost: A cost caused by the development, production or acquisition of different items is called a product level or process level cost. These include engineering change orders, equipment maintenance, product development and scrap, if related to product design.
  • Facility-level cost: Some costs cannot be related to a particular product line. These are instead related to providing a facility. For e.g. Cost of maintaining a building or plant security or advertisement promoting the organization.
  • Organizational-level cost: Certain costs are incurred at organizational level for the single purpose of supporting continuing facility operations. These organizational level costs common too many different activities and products and services can be prorated among services and products on an arbitrary basis only. These costs are not product related .thus they should be subtracted from net product revenues instead of an arbitrary and illogical apportionment.
  • Cost Pool: Costs are grouped into pools according to the activities, which drive them. In this all costs associated with procurement i.e. ordering, inspection, storing etc would be included in this cost pool and cost driver identified.

The technique of ABC lays importance on different costs for different costs, which are relevant to a particular decision.

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