Activity Based Costing is a system of assigning costs to products or services based on their consumption of resources. it provides more accurate data and a detailed view of the cost of products or services based on the activities that are required to produce them and also identifies and measure the activities that drive those costs. The activity Based Costing method involves identifying activities within an organization and more accurate details about cost drivers and cost behavior within an organization, determining the resources of consumption by each activity, and also assigning costs to specific activities and processes based on their utilization of those activities.
Activity Based Costing allocates costs to products or services based on their usage of activities. Activity Based Costing quantifies the cost driver associated with activities and enables businesses to make important decisions regarding pricing, process improvement, and allocation of resources. The most important things about Activity Based Costing is a cost allocation, cost visibility, cost accuracy, process improvement, decision-making, strategic planning, and enhanced cost management.it provides the most precise cost allocation as compared to the traditional costing method. which is the rely on arbitrary cost drivers such as direct labour hours and machine hours.
Activity Based Costing enhances cost visibility by breaking down costs into individual activities, allowing organizations to understand the cost driver and identify areas of inefficiency. it provides a detailed view of how resources are utilized throughout the organization. The activity Based Costing method helps to organizations make more important decisions about pricing, product profitability, and resource allocation. ABC provides valuable decision-making such as product pricing, product mix decision, and outsourcing decision and helps to organizations for the understanding of true cost and profitability of products. and services. ABC support to strategic planning for cost drivers, and optimal utilization of resources, and improves overall performance. Activity Based Costing promotes better cost management by fostering cost consciousness throughout the organization.
