Activity Based Costing (ABC)
Activity Based Costing (ABC) Meaning
An activity-based costing method identifies overhead and indirect costs associated with related products and services. Unlike traditional costing methods, this method recognizes the relationship between costs, overhead activities, and manufactured products. There are, however, some indirect costs that are difficult to assign to a product, such as management and office staff salaries. Manufacturing companies primarily use activity-based costing (ABC) since it enhances the reliability of cost data, resulting in nearly true costs and a better classification of costs.
By allocating manufacturing overhead costs on the basis of product activity rather than machine hours, activity-based costing (ABC) provides a more logical method of allocating manufacturing costs. In activity-based costing, overheads are first assigned to the activities that generate them. Costs for those activities are then assigned only to products that require them.