Activity-Based Costing (ABC)
A costing methodology that identifies activities and assigns costs to products based on resource consumption, providing more accurate product and customer profitability.
Activity-Based Costing (ABC)
A costing methodology that identifies activities in an organization and assigns the cost of each activity to products and services according to their actual consumption, providing more accurate cost data than traditional allocation methods.
For instance, a manufacturing company might identify activities like machine setup, quality inspection, and material handling, determine costs for each activity, establish cost drivers (like setup hours or number of inspections), and then assign costs to products based on how many cost driver units each product consumes.
ABC provides better visibility into the true costs of processes, products, and customers by recognizing that products consume activities, not just direct resources. While more complex to implement than traditional costing, it helps managers identify non-value-added activities, understand cost behaviors, and make better-informed decisions about pricing, product mix, and process improvements.