Activity-based costing
Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. This method provides a more accurate way of allocating costs compared to traditional costing methods.
For example, let’s consider a manufacturing company that produces two types of products – Product A and Product B. Traditional costing methods may allocate overhead costs based on direct labor hours or machine hours. However, ABC would identify the activities that drive costs, such as setup time, machine maintenance, and quality control. The cost of these activities would then be allocated to each product based on their actual consumption of each activity.
By using ABC, companies can better understand the true cost of their products and services, leading to more informed pricing decisions and improved profitability.
Benefits of Activity-based costing:
- More accurate cost allocation
- Enhanced decision-making
- Improved product pricing
- Identification of cost saving opportunities
Overall, activity-based costing provides a more comprehensive view of costs within an organization, allowing for better strategic planning and resource allocation.
For more information on Activity-based costing, you can visit Wikipedia.