, Introduction & Core Philosophy
1. What is Activity-Based Costing (ABC)?
Traditional costing often fails by spreading
overhead costs uniformly. ABC is a costing
method that assigns overhead and indirect
costs to specific activities and then to
products/services based on their actual
consumption.
Why ABC? (The Limitation of Traditional Methods)
Accuracy: Unlike traditional methods that use a
single "plant-wide" rate, ABC identifies the true
cause of costs.
omplexity: Ideal for companies with diverse
C
product lines where some products consume
more resources than others.
Key Terms to Know
Cost Pool: A grouping of individual costs (e.g., "Machine
Setup Pool").
Cost Driver: The factor that causes a change in the cost of
an activity (e.g., Number of setups, Machine hours).
Activity: Any event or task that consumes resources (e.g.,
Designing, Inspection).
1. What is Activity-Based Costing (ABC)?
Traditional costing often fails by spreading
overhead costs uniformly. ABC is a costing
method that assigns overhead and indirect
costs to specific activities and then to
products/services based on their actual
consumption.
Why ABC? (The Limitation of Traditional Methods)
Accuracy: Unlike traditional methods that use a
single "plant-wide" rate, ABC identifies the true
cause of costs.
omplexity: Ideal for companies with diverse
C
product lines where some products consume
more resources than others.
Key Terms to Know
Cost Pool: A grouping of individual costs (e.g., "Machine
Setup Pool").
Cost Driver: The factor that causes a change in the cost of
an activity (e.g., Number of setups, Machine hours).
Activity: Any event or task that consumes resources (e.g.,
Designing, Inspection).
