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What Is ABC Costing?

Activity-based costing (ABC) is a costing methodology that assigns indirect costs to products and services based on their actual consumption of activities and resources. ABC identifies activities in an organization and assigns costs to products according to consumption. This provides more accurate costing than traditional methods. ABC is used for strategic decisions like pricing, outsourcing, and process improvement. It helps companies identify unprofitable products/services to eliminate or processes to make more efficient.

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Sophie Orozco
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87 views2 pages

What Is ABC Costing?

Activity-based costing (ABC) is a costing methodology that assigns indirect costs to products and services based on their actual consumption of activities and resources. ABC identifies activities in an organization and assigns costs to products according to consumption. This provides more accurate costing than traditional methods. ABC is used for strategic decisions like pricing, outsourcing, and process improvement. It helps companies identify unprofitable products/services to eliminate or processes to make more efficient.

Uploaded by

Sophie Orozco
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ABC costing

What is ABC costing?


Activity-based costing (ABC) is a costing methodology that identifies activities in an
organization and assigns the cost of each activity with resources to all products
and services according to the actual consumption by each. This model assigns
more indirect costs into direct costs compared to conventional costing. In a
business organization, the ABC methodology assigns an organization's resource
costs through activities to the products and services provided to its customers.
ABC is generally used as a tool for understanding product and customer cost and
profitability based on the production or performing processes. As such, ABC has
predominantly been used to support strategic decisions such as pricing,
outsourcing, identification and measurement of process improvement initiatives.
With ABC, a company can soundly estimate the cost elements of entire products
ACTIVITIES and services. That may help inform a company's decision to either:
1. Identify and eliminate those products and services that are unprofitable and
lower the prices of those that are overpriced (product and service portfolio
aim)
2. Or identify and eliminate production or service processes that are ineffective
and allocate processing concepts that lead to the very same product at a
better yield.

What are the major differences from traditional costing?


Basically, the traditional costing is used commonly by manufacturing companies to
assign manufacturing overheads to the units they produce. Using this, only the
products are assigned an overhead cost by the accountant. The downside of this
method of costing is that it neglects to consider the non-manufacturing costs like
administration expenses which are associated with production. On the other hand,
the activity-based costing (ABC) is a more logical method of assigning
manufacturing overhead costs to products. Unlike traditional costing that simply
assigns costs based on the machine work hours, the ABC assigns costs first to the
activities and processes that cause the overhead. Then, these costs are assigned
only to the products that require the activities.

Basic differences of the two methods of costing:


1. The traditional costing method focuses on structure rather than on
processes while the ABC is more on the activities than on structure.
2. Traditional costing method is already obsolete especially with the changing
technology trends such as the introduction of the business accounting
software.
3. The ABC provides more accurate costs of products.
4. Whereas the traditional costing method has increasingly become obsolete,
the ABC became a rising method since 1981.

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