What Is Activity Based Costing

In other words it s a way to allocate indirect overhead costs to products or departments that generate these costs in the production process.

What is activity based costing. Activity based costing is a managerial accounting method that traces overhead costs to activities and then assigns them to objects. The activity can be placed anywhere within an organizational structure comprising of a project or process. Activity based costing also known as abc costing refers to the allocation of cost charges and expenses to different heads or activities or divisions according to their actual use or on account of some basis for allocation i e. Activity based costing is a more specific way of allocating overhead costs based on activities that actually contribute to overhead costs.

Once costs are assigned to activities the costs can be assigned to the cost objects that use those activities. The abc system of cost accounting is based on activities. Activity based costing abc is a method of assigning overhead and indirect costs such as salaries and utilities to products and services. Activity based costing or abc is a costing approach for optimizing cost and time.

Besides measuring the performance of an activity this cost accounting technique helps to identify all the costs related to every unique activity. Cost driver rate which is calculated by total cost divided by total no. What is activity based costing. Of activities to arrive at a profit.

What does activity based costing mean.