Definition: Activity based costing (ABC) is concerned with ‘cost attribution to cost units on the basis of benefit received from direct activities eg. ordering, set-up, assuring quality’.
ABC states that activities cause costs and products/cost units consume the activities. It is used by management to determine the most profitable products and to appreciate the cost implications of the operational activities within the business. It gets management to understand what causes costs. The technique uses cost drivers to attribute costs to activities and cost objects. Thus, overheads can be related to the activities which cause them.
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