A framework for the design and audit of an activity‐based costing system

The objective of a cost management system is to provide accurate and useful information to help companies in utilizing their valuable resources for producing quality goods and services in a competitive environment. Activity‐based costing (ABC) has been found more appropriate for capital intensive manufacturing environments. However, there is no systemic framework for design and implementation of ABC. Realizing the importance of ABC, an attempt has been made in this paper to develop a framework for the design of an ABC system. It is based on the review of literature on the design and implementation of ABC. In ABC, the activities required to manufacture a product should be identified and then quantified by their consumption of resources. The cost of each activity that is required to produce the product/parts will be calculated in such a way that the factors causing or driving the cost (cost drivers) of the activity in question can be determined. The cost driver rate will be used to allocate the cost of activities to a product/part according to the volume of the cost driver. In addition, the advantages and limitations of ABC are also discussed.