COSTING METHODOLOGIES: ACTIVITY-BASED COSTING

Different from traditional costing methods, ABC systems focus on what activities of people and equipment are required to produce a product or provide a service, as well as how activities are consumed. To allocate indirect costs (e.g., overhead) to products or services, ABC systems identify (1) resources and their costs, (2) consumption of resources by activities, and (3) performance of activities to products or services. Under ABC, resources are allocated to activities using cost drivers, which are used to calculate the cost per activity. Activity costs are then traced to each product or service by determining how many units of activity each product or service consumes, multiplied by the cost per activity.

Source: IMA, Implementing Activity-Based Costing, 2014, bit.ly/3RyWqfL