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Activity Based Costing system, right from its inception by earlier proponents as Robert Kaplan, seeks to differentiate between Activities provided by different Functions and Departments in business. And if the Activities/Functions are really so different from one another, It makes no sense to allocate them to Production on the same basis as other Activities.

What is Activity Based Costing?
Activity Based Costing (ABC in short) is a Costing methodology, whereby Costs/Overheads for different Activities are allocated/apportioned to products/services, based on the actual services rendered. Unlike in Traditional Manufacturing Costing system, no common basis/parameter is used as a universal allocation basis.

1.    Departments/Functions are first categorized into individual Activities (eg. recruitment Activity under HR Department, Financing Activity under Account & Finance function)
2.    Basis of expense-allocation for each Activity is ascertained
3.    All chosen bases are identified and measured for each Manufacturing center
4.    Overheads are then allocated to Manufacturing centers on such bases. Step-down methods followed where further allocation-reallocation is needed.
5.    All overheads allocated to a Manufacturing Center are added for an onward Application to Products/Services.

Common Challenges tackled by Activity Based Costing System Assignment Help:
One major challenge is often identifying the actual basis on which the Activity-cost shall be allocated. Students lacking a direct knowledge of practical situations in the commercial world may find it all the more difficult.

Moreover, the Allocation calculations might be too laborious and stretching. A Long (or Trial & Error) method in Step-down allocation might take unnecessarily long. The Simultaneous Equation method, on the other hand, may need finer mathematical understanding and availability of all necessary inputs.

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