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Business help: Activity Based Costing

What is activity-based costing? What are some of the key elements of activity-based costing? How does this method differ from a more traditional costing method? 350+ words

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Activity-Based Costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to products and services according to the actual consumption by each in order to arrive at the actual cost of products and services.

In Activity based costing costs of all organisation's resources are assigned to the products and services that the organization manufacture/render.The main intention behind the assignment of resource cost to the product/services is to find out the cost of the product and the resultant profitability.


The main purpose of Activity Bases costing is the elimination of unprofitable activities in the organization.Further, to identify the over priced activities in order to lower the prices of those activities. It is generally used as a tool for understanding product and customer cost and profitability. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement ...

Solution Summary


ABC has been used

1.to support strategic decisions of the management such as pricing, outsourcing and identification and measurement of process improvement initiatives.

2.determine the true contributors to and detractors of financial performance

3.Determine the most and leastr profitable customers/products/services.

4.Identify the causes of poor financial performance

5.Determine the profitable marketing mix

6.Achieve better positioning of the products in the market.

7.Achieve the bargaining power with customers.

8.Help managers with cost data to drive for improvement.

1.Cost centres:Cost centers are divisions that add to the cost of the organization, but only indirectly add to the profit of the company. Typical examples include Research and Development, Marketing and Customer service.

2.Cost Driver:Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The measure of the use of a shared activity by each of the products is known as the cost driver. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product's transactions takes at the counter and then by measuring the number of each type of transaction.

3.cost pool;Aggregation of all associated cost elements of an activity.