A manufacturing company based in India is planning to transition from its traditional costing system to Activity-Based Costing (ABC) in order to…

CA Intermediate · Cost and Management Accounting · RTP · September 2025
A manufacturing company based in India is planning to transition from its traditional costing system to Activity-Based Costing (ABC) in order to improve cost accuracy and gain better insights into product profitability. Given the company’s diverse product portfolio and the complexity of its production processes, the implementation of ABC is expected to provide a more precise allocation of overheads. You are required to SUGGEST the key practical stages involved in successfully implementing an Activity-Based Costing system.

Suggested Answer and Working Notes:

A number of distinct practical stages that are required in the ABC implementation are given below: (1) Staff Training: The co-operation of the workforce is critical to the successful implementation of ABC. Staff training should be done to create an awareness on the purpose of ABC. (2) Process Specification: Informal, but structured interviews with key members of personnel will identify the different stages of the production process, the commitment of resources to each, processing times and bottlenecks. (3) Activity Definition: The activities must be defined clearly in the early stage in order to manage the problems, if any, effectively. There might be overloading of information from the new data, but the same is needed in codification. (4) Activity Driver Selection: Cost driver for each activity shall be selected. (5) Assigning Cost: A single representative activity driver can be used to assign costs from the activity pools to the cost objects.

Topics: Activity Based Costing, Overheads - Absorption Costing Method

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