Activity-Based Costing (ABC)

Activity-Based Costing (ABC)

1. Activity-based costing is a costing system that divides production into activities where costs are accumulated into multiple cost pools and allocated to the product based on the level of activities (defined by cost drivers) demanded by the product. Activity-based costing is normally used as a supplement to, rather than a replacement for, a firm's absorption costing system. Activity?based costing normally allocates costs in addition to normal manufacturing costs, and the cost drivers are often nonfinancial activities. Absorption costing is frequently contrasted with traditional cost allocation, a method that assumes a single cost pool and a single cost driver. See also variable costing and absorption costing and cost pool. A costing system that (a) identifies the relationship between the incurrence of cost and activities; (b) determines the underlying "driver" of the activities; (c) establishes cost pools related to individual "drivers"; (d) develops costing rates; and (e) applies cost to product on the basis of resources consumed (drivers).