Activity Based Costing

Activity-based costing (ABC) is a cost accounting methodology that identifies and assigns costs to specific activities or tasks within an organization, and then uses those costs to allocate overhead costs to products or services. This approach contrasts with traditional cost accounting methods, which allocate overhead costs to products or services using a single overhead rate based on direct labor hours or machine hours.

Activity-based costing was first introduced in the 1980s as a response to the limitations of traditional cost accounting methods. In traditional cost accounting, overhead costs are often assigned to products or services based on volume, such as the number of units produced or the number of direct labor hours required to produce the product. However, this approach fails to accurately allocate overhead costs to products or services because it assumes that overhead costs are proportional to direct labor or machine hours.

ABC recognizes that overhead costs are not directly tied to direct labor or machine hours, but rather to the activities or tasks that consume those resources. For example, setting up a production run and inspecting finished products are activities that consume resources, but they may not be directly tied to the number of units produced or the direct labor hours required to produce those units. ABC identifies _____ ______ ______ ______ ______ _________ ___ __________ __________ _______ ________.
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