# Calculating Unit Costs using the ABC Method Unit 5 Introduction | Backflush Costing | Activity-Based Costing | Calculating Unit Costs using the ABC Method

Calculating unit costs using the ABC approach involves aggregating all expenditure that can be associated with a particular activity.

When we are dealing with individual elements or components (Level 5), it may be relatively straightforward to identify the unit cost if the activity is paid for on a piece-work or contract basis. Thus, the direct costs of providing tutorials, printing study guides or marking assignments are usually easy to determine.

However, tt may be more convenient to attach other costs at a higher level in the hierarchy. For example, the salary of a permanent member of staff with responsibility for a number of courses might best be aggregated at Level 2 or 3.

Finally, you may only be able to account for expenditure on senior management, financial administration, human resources, and other business-sustaining activities at the level of the institution as a whole. However, as discussed in Unit 4, it is desirable for these overheads to be apportioned and absorbed into programmes or courses in order to determine the full costs of providing these services.

In order to calculate unit costs using the ABC framework, a number of steps are necessary:

1. You should decide what level in your hierarchy of cost objects will be used for analysis. All of the costs associated with these activities at the same and lower levels must be added together.
2. Overheads and other costs that can only be aggregated at a higher level should be apportioned and absorbed at the level required.
3. The resulting total should be divided by the number of units used or produced.

The equation for this is as follows:

ABC Unit Costs EQUATION:

Cco = TCco/Nco

Where:

Cco = cost per unit of cost object
TCco = total costs attached to cost object
Nco = number of units of cost object

Activity
 Exercise 5.3 provides an opportunity to practice calculating the unit costs of different courses using the Activity-Based Costing approach. Feedback: You can check your answers by clicking on Exercise 5.3 – Answer Sheet

Exercise 5.3 highlights the differences in unit costs of different courses. Clearly, total expenditure for the junior and senior secondary education courses is much higher than for the other courses. However, the cost per FTE student for the Community Work course is over fifteen times higher than the comparable cost for the junior secondary course. Using the backflush costing method, such differences would be overlooked.