Traditional methods of costing classified the manufacturing costs into three categories: Direct materials, indirect materials and Manufacturing overhead. Direct material and direct labor costs can be allocated to products easily. However, calculating the overhead cost for the products is difficult and may not be accurate. Overhead costs are generally applied using a weighted average for the products.

Activity Based Costing (ABC) is a new costing approach used to calculate the overhead costs for products. ABC allocates over head costs per activity used in generation of the product/service. ABC gives a more accurate cost per product than traditional costing methods. “ABC generates more accurate cost and performance information related to specific products and services than is available to managers through traditional cost accounting approaches.” [5]. ABC helps the management in making informed decision due to the accuracy in product costs.

This step involves identifying the costs related to the activities preformed in an organization. The costs can be direct or indirect costs. Examples of these costs may be wages, office supplies, management salaries etc. when exact costs are not available, budgeted or estimated costs can be used [8].

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