What is abc?
Activity Based Costing (ABC) is a systematic, cause & effect method of assigning the cost of activities to products, services, customers or any cost object. ABC is based on the principle that “products consume activities”. Traditional cost systems allocate costs based on direct labor, material cost, revenue or other simplistic methods. As a result, traditional systems tend to overcost high volume products, services and customers and undercost low volume. ABC systems trace costs using multiple allocation methods in a Bill of Activity format. ABC allocation methods are frequently called cost drivers. Using the Order Processing example, ABC would assign more cost to a customer that orders once a week $1,513.20 (52 X $29.10) than a customer that orders monthly. Many organizations use ABC today for product costing, target costing, service pricing, customer profitability analysis and product line profitability analysis.
