Basics of Activity Based Costing

ABC assigns costs to products by tracing expenses to “activities”. Each Product is charged based on the extent to which it used an activity. The primary objective of ABC is to assign costs that reflect/mirror the physical dynamics of the business provides ways of assigning the costs of indirect support resources to activities, business processes, customers, products. It recognizes that many organisational resources are required not for physical production of units of product but to provide a broad array of support activities.

Cost of a product is the sum of the costs of all activities required to manufacture and deliver the product. Products do not consume costs directly.