The activity-based approach

The activity-based (AB) approach concentrates on overhead costs, which are a significant percentage of total costs for many organizations in both the private and public sectors. In the 1980s the AB approach concentrated on product or service costing with a two-stage process. First, overheads are pooled on the basis of activities (such as material handling and purchasing) which consume resources. Second, products or services consume activities and cost drivers (such as the number of material movements and number of purchase orders) are the links between activity cost pools and product (or service) lines. One initial attraction of AB costing was the different unit product (or service) costs calculated on an AB basis from the unit product (or service) costs calculated using traditional overhead costing. Details of the mechanics of AB costing can be found in Innes and Mitchell (1992).