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Step 5: Determination of cost driver rate
The cost driver rate will be computed with the help of suitable cost driver. Find total expense of a particular
activity. Divide it with the help of cost driver. The value obtained will be the cost driver rate.

Total cost of of activity
Activity cost driver rate =
Activity cost driver

Step 6: Assignment of cost with the product or service
The final step in Activity Based Costing is to identify the cost with the final products which can also be called as
cost objects. Now, the total indirect costs incurred can be distributed to each activity with the help of rate find by
dividing the indirect cost with appropriate cost driver.
Cost = Activity cost driver rate × Resources consumed

For example, the expense on maintenance of railway track can be apportioned to different rail on the basis of
number of rails going through that particular track during particular period of time or on basis of kilometres. Then
that indirect cost can be allocated to the particular train.
Figure 7: Activity Based Costing Model for Railways

Resource Cost

Direct Cost ( Direct Allocation) Indirect Cost (Allocation by cost driver)

Good Transport Service

Manag Human Personal Finance/ Traffic Infras Vehicle Traction
Research
ement Reso Relat Account Planning tructure Service Service
Passenger Transport System

Example of cost computation of passenger transport service 3. The cost driver for the apportionment of track
with Activity Based Costing: maintenance cost can be the kilometre or number of
The cost computation for a particular passenger trains, or number of train runs. However, the number
train between the two destinations for the year can be of train runs during the period will be more suitable.
computed with the help of ABC costing in the following 4. Then divide the total cost of track maintenance with
manner: the cost driver. This will be the cost driver rate.
1. Find the direct costs associated with that particular 5. Now, multiply the cost driver rate with the number
train. The direct cost will be directly allocated to each of runs made by a particular train for which cost
train. The direct costs can be traced as the amount is computed. It will be the track maintenance cost
of store supplies issued to the train during the year, allocated to the train. It will help to identify the high
catering materials issued, salaries paid to the staffs maintenance cost associated with the train.
working for that specific train during the year and 6. Similarly, all the indirect costs can be allocated to a
other direct expenses. particular train with the help of suitable cost drivers.
2. The indirect costs can be the maintenance of railway 7. The direct costs and allocated indirect costs will be
track for which the exact cost cannot be identified for added to find the total cost incurred.
the specific train. It can be allocated in ABC costing 8. It will help to decide the passenger fare per kilometre.
suitably. The total maintenance cost during the year The costing can be suitably made with the help of
or given period for the track will be identified and Activity based costing model.
pooled.

www.icmai.in May 2017 l The Management Accountant 35