Computation Method of Accountancycareers Posted by birendra kunwar on 9:29 PM

The method for computing the cost under activity based costing outlined as follows :

Step 1) To find out the cost traced to activities.

Step 2) To determine the cost drive for each activities.

Step 3) To find out the cost drive rate.

Step 4) To find out cost traced to product.

Traditional costing system is not applying the above given computation method. Both system trace overhead costs to product on the basis of cost centre’s. The differences we find between the two systems are allocation from cost centre to product. Traditional cost system traces overhead cost to products using small number of allocation bases , which vary directly with the volume of product produced . But activity based costing system uses many driver as allocation basis. The activity based costing , cost driver ratio should therefore be more closely related to the causes of overhead costs.

For providing an overview of traditional and activity based costing system, the following chart and example are presented.