to production centres, as is the case under traditional costing system. Thus, traditional costing system reveals less accurate costs as compared to ABC system. This is primarily because cause and effect relationship is considered under ABC system to identity support cost objects, which is not the case under traditional costing system. r12 Optimal Costing System Such a system is different from entity to entity. It depends upon an in-depth analysis of costs and benefits associated with designing of an appropriate costing system. ABC system is definitely more scientific because it produces more accurate product cost, but such a system should be implemented when it is more economical vis-a-vis traditional costing system. Following factors should be taken into consideration before installing activity based costing system: 1. Extent of competition, 2. Standardisation of product and 3. Proportion of overhead cost to total cost. To conclude, activity based costing system may be more appropriate when competition is fierce, enterprise produces varied products, without standardisation with regard to consumption of resources and when overhead cost assumes a large proportion of total cost. ABC system requires the following: 1 Setting-up of an information system which could help trace all the costs to cost objects. 2 Support from top to bottom because the system involves people at all levels. 3. Integration of system into financial system. For it, computerization may be required. The final words of comment over ABC system are that adoption, implementation and operation of the system is not an end in itself. The benefits can be derived by translating the system design and its operation into action-oriented managerial performance. Ultimately, it amounts to effective cost management for the success of the system. The concept of Activity Based Costing can be understood with the help of following illustration: Illustration. 1: A company manufacturing two products furnishes the following data for a year Product Annual Output (Units) Total Machine hours Total number of purchase orders Total number of sel-ups 20,000 20 A B 5,000 60,000 160 384 1.20,000 44 The annual overheads are as under: Rs. Volume related activity costs 5,50,000 Set up related costs 8.20,000 Purchase related costs 6,18.000 You are required to calculate the cost per unit of each Product A and B based on: (1) Traditional method of charging overheads. (11) Activity based costing method