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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.

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