Definition

Activity-based costing (ABC)

Activity-based costing (ABC) is a method of allocating overhead based on each product’s use of activities in making the product.

In order to obtain more accurate product costs, many companies now allocate overhead using activity-based costing (ABC). For example, companies can keep track of their cost of setting up machines for each batch of a production process. Then companies can allocate part of the total set-up cost to a particular product based on the number of set-ups that product required.

Activity-based costing is beneficial because it results in more accurate product costing and in more scrutiny of all activities in the value chain.

Share it:  Cite

More from this Section

  • Income summary
    Income summary refers to a temporary account used in closing revenue and expense accounts. ...
  • Direct material quantity standard
    The direct material quantity standard is the quantity of direct materials that should ...
  • Drawings
    Drawings refer to the withdrawal of cash or other assets from an unincorporated business ...
  • Equity method
    Equity method is an accounting method in which the investment is common stock is initially ...
  • Direct materials budget
    The direct materials budget shows both the quantity and cost of direct materials to be ...