1.2 ABC and cost drivers
ABC is an alternative approach to the traditional method of absorption costing outlined above.
The traditional method of overhead absorption effectively absorbs on a production volume basis and may be misleading for costs where the behaviour is not directly related to production volume.
For example, the cost of quality control may be driven more by the number of inspections made rather than the overall volume of units manufactured.
The ABC approach is to link overhead costs to the products or services that cause them by absorbing overhead costs on the basis of activities that ‘drive’ costs (costs drivers) rather than on the basis of production volume.
§ A cost pool is an activity that consumes resources and for which overhead costs are identified and allocated. For each cost pool, there should be a cost driver.
§ A cost driver is a unit of activity that consumes resources. An alternative definition of a cost driver is a factor influencing the level of cost.
