Example of ABC System

Assume an example, such the cost pool for the ordering activity totaled of Ksh.100, 000 and such there were 10,000 orders the cost driver. Therefore all products would be charged along with Ksh.10 for each order it required. Therefore a batch requiring five orders would be charged along with Ksh.50 like its share of the ordering costs for the period.

Absorption costing and ABC are same in many respects.  In mutually systems, direct costs go straight to the product and overheads are allocated to production cost centres/cost pools. The dissimilarity lies in the manner whether overheads are absorbed into products. Absorption costing most commonly employs two absorption bases machine hours and /or labour hours to charge overheads to products ABC employs many cost drivers like absorption bases number of orders, number of dispatches.

This refers to the assignment or distribution of a group of costs to cost centers. That costs are assimilated in as same and must be allocated on the similar base. Allocation base is the measure of activity employed to allocate a cost pool to the cost centers.