It appeared in the middle of the nineteenth century, and explaining the cost based on activity ABC is considered a modern approach to cost allocation, and this type of activity depends on the allocation based on the activities that cause the cost to occur.
Cost Explanation Dimensions Based on ABC
The First Dimension
This dimension is considered with how costs are allocated based on activity, and is represented by the vertical axis.
The Second Dimension
Controlling over the processes that are dealt with through the interrelationships between a group of activities, and providing performance measures, and this dimension is represented by the horizontal axis.
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The Relationship Between the First and Second Dimensions
How this activity-based system extends from a product-focused framework to an activity-based focus.
Explaining the Cost System
Among the attempts that were aimed at improving the measurement of costs, especially indirect types of costs, and include many things such as indirect resources, indirect wages, and some other indirect costs, the most important of which are insurance costs, real estate taxes for companies, lighting and heating costs. Machinery in terms of maintenance, manufacture, and repair, in addition to other costs in the company, and these indirect costs were considered by specialists to be of a general nature, which we cannot be calculated for some specific products before the emergence of this system.
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The Basic Advantages of the Cost System
Calculating the Exact Cost of the Product
Vision on how to reduce costs and give a lot of opportunities, so that we can improve the overall performance of companies.
Division of the Facility According to Activities
These activities are divided into sections, including main activities, and support activities.
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Basic Activities
Activities that are fully responsible for the management, operation of construction, and can be divided into subgroups these groups of activities contribute to achieving the goals that are set by the institution. It is a group of processes that are interconnected among them so that we can perform work within the facility.
Criteria Used to Reduce the Number of Activities
Activity Level Criterion
It determines the suitability of a particular activity to engage in a specific set of activities that are at the same level, and this criterion contributes to the activities being of equal levels, and logically interconnected at the same time.
The Costing Criterion for the Activity
It is valid to enter the activity in a group of activities so that we can use this activity as a reason for the cost that is used in the rest of the types of group activities.
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Classification of Activities
We can employ it according to the activity level, the most important of which are:
- According to the level of the unit.
- Production batch.
- According to the enterprise product level.
- According to the factory level.
Cost Purposes
Combining all costs at once, and the most important types of cost purposes are:
The Final Cost
The ultimate purpose for which all costs are spent in the facility.
Average Cost
Activity is introduced into the organization to achieve benefit within the organization’s subjective domain.
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