Activity Based — Costing Meaning Fixed

The ABC process begins by breaking down overhead into "cost pools." These are groups of individual costs related to specific activities, such as machine setups, material handling, or customer service. Once these pools are established, the company identifies "cost drivers." A cost driver is the factor that causes the cost of an activity to increase or decrease. For a machine setup cost pool, the driver is likely the number of setups performed. For a customer service pool, the driver might be the number of support calls received.

Activity Based Costing represents a significant evolution in management accounting. By shifting the focus from simple volume-based allocation to a cause-and-effect relationship between activities and costs, ABC provides management with the visibility needed to improve processes and profitability. activity based costing meaning

Traditional costing asks, "How much overhead did we spend?" ABC asks, "What activities did we do, and which products required them?" The ABC process begins by breaking down overhead

Allocate all $230k based on direct labor hours. Chairs (80% of hours) get $184k; Cabinets get $46k. For a customer service pool, the driver might