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Unit 14: Introduction to Recent Development in Cost Management

drivers as well as activity drivers. The management of TVS & Sons Ltd., decided to close the plant Notes
in Madurai division due to above discussed and later desired to rejuvenate the coach division of
Trichy at Viralimalai to meet the market demands at reasonable cost.

Segmentation of new products: The firm should meet the needs and demands of the various
classes of people through a wide range of products. The segmentation of the products should
be appropriately done only by studying the cost of resource and activity drivers, for meeting
the needs and demands of specific class of buyers. The ABC is the proper tool for the fi rm to

introduce new products to cater the demands of various classes of people.
14.1.3 Process of Calculating ABC

The next important stage is to understand the process of calculation under ABC.

Figure 14.9

Identification and Classification of the activities of the firm

Primary Activities Secondary Activities

Establish the relationship in between the Overheads and Resources and Activity Drivers

Overheads related to support and To determine the pools of the cost of
Primary Activities activities

Determine the activity cost pools Apportion the cost of support activities
+ on the basis of primary activities

Total cost of the activity drivers
Total cost of the activity
Activity Cost Driver

To determine the activity cost driver rate

Resources Consumed
x
Activity Cost Driver Rate
To assign costs to the cost objects

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