Activity-Based Costing (ABC)
Activity-based costing assigns overhead costs to products based on the activities that drive those costs, using multiple cost drivers rather than a single allocation base.
Explanation
ABC identifies activities (e.g., machine setups, quality inspections, purchase orders), assigns costs to activity cost pools, and allocates those costs to products using activity-specific cost drivers. This produces more accurate product costs than traditional methods, especially when products differ significantly in complexity, volume, or resource consumption. ABC is particularly useful when overhead is a large proportion of total costs and products vary widely in their use of resources.
Key Points
- •Assigns costs using multiple cost drivers matched to activities
- •More accurate than traditional single-rate overhead allocation for diverse products
- •Best suited when overhead is significant and products consume resources differently
Exam Tip
ABC typically shifts costs from high-volume, simple products to low-volume, complex products — know how to compare ABC results to traditional costing.
Frequently Asked Questions
Related Topics
Cost Accounting
Cost accounting is the process of recording, classifying, analyzing, and allocating costs to products, services, or activities to support management decision-making.
Variance Analysis
Variance analysis compares actual results to standard or budgeted amounts to identify and explain the causes of deviations in cost and revenue performance.
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