Activity Based Costing Meaning -

Activity-based costing (ABC) is a specialized accounting method that identifies the specific activities within an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. This model provides a more accurate view of product costing and profitability than traditional cost-accounting methods.

Under traditional costing, Cabinets looked cheaper to make than they really are. ABC reveals their true cost—and shows that Chairs are actually more profitable than previously thought. activity based costing meaning

Consider a factory producing two types of pens: (high volume, simple design) and Fountain Pens (low volume, complex design). ABC reveals their true cost—and shows that Chairs

By using these drivers, ABC assigns costs based on how much of an activity a product actually uses. If Product A is simple and requires only one setup a month, it is assigned a small portion of the setup overhead. If Product B is complex and requires daily setups, it carries a much larger share of that cost. If Product A is simple and requires only

Implementing an ABC system involves a four-step process:

Traditional costing asks, "How much overhead did we spend?" ABC asks, "What activities did we do, and which products required them?"