Activity-based costing (ABC) is a methodology for assigning costs to products or services based on the resources they actually consume. Before ABC was invented, overhead costs were typically assigned to product lines as a proportion of direct costs, such as labour hours. This was a simple way of doing things, but it often led to inaccuracies in assessing how much items actually cost to manufacture. ABC resolves those inaccuracies.
When to use it
- To get an accurate picture of the costs of manufacturing individual products.
- It is particularly valuable in a complex production environment where many products use the same inputs.
The concept of ABC originates in work by George Staubus on activity costing and ...