What is Activity-Based Costing?
Activity-based costingABC is a method for assigning costs to products, services projects, tasks, or acquisitions, based on:
The activities that go into them
Resources consumed by these activities
ABC contrasts with traditional costing (cost accounting), which sometimes assigns costs using somewhat arbitrary allocation percentages for overhead or the so-called indirect costs. As a result, ABC and traditional cost accounting can estimate the cost of goods sold and gross margin very differently for individual products. Contradictory and uncertain cost estimates can be a problem when management needs to know exactly which products are profitable and which are selling at a loss.