activity based costing (ABC)



Cost accounting approach concerned with matching costs with activities (called cost drivers) that cause those costs. It is a more sophisticated kind of absorption-costing and replaces labor based costing system. ABC states that (1) products consume activities, (2) it is the activities (and not the products) that consume resources, (3) activities are the cost drivers, and (4) that activities are not necessarily based on the volume of production. Instead of allocating costs to cost centers (such as manufacturing, marketing, finance), ABC allocates direct and indirect costs to activities such as processing an order, attending to a customer complaint, or setting up a machine. A subset of activity based management (ABM), it enables management to better understand (a) how and where the firm makes a profit, (b) indicates where money is being spent and (c) which areas have the greatest potential for cost reduction. Developed by professors Robert Kaplan and Robin Cooper of Harvard University in late 1980's.

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  • I wondered how much activity based costing they would endure over the next few months and if it would effect their overall well being.

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  • The activity based costing method was the best decision our firm has made as we were able to track our inventory better.

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  • If you can accurately assess the activity based costing you will be able to figure out how much to charge.

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