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Activity-based costing is a two-stage overhead cost allocation system that identifies activity cost pools and cost drivers that include activities that do not relate to the number of units produced.
What is activity based costing?
- Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal.
- It is a methodology for more precisely allocating overhead costs by assigning them to activities.
- ABC assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities.
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