Activity-based costing (ABC) increases the understanding of overheads and cost drivers, making costly and non-value adding activities more visible, which allows managers to reduce or eliminate them.
ABC assigns overhead and administrative costs to activities that are in direct relationship with a particular overhead cost. Based on these relationships, activity costs are then allocated to products, servicers, suppliers or customers.
This enables companies to identify the true costs of processes and products, therefore improving the budgeting and cost management process, and providing an accurate and reliable outline of costs involved in each activity of a business' operations.
Copyright © Tridant Pty Ltd.
