What does activity-based costing help to provide a better understanding of?

Activity-based costing (ABC) is a method that provides a more accurate allocation of costs to products and services based on the actual activities required to produce them. By focusing on the specific activities that drive costs, ABC allows businesses to understand how various costs behave in relation to different products, services, or customers. Therefore, it provides a clearer picture of cost behaviors, revealing how costs change with different levels of activity.

This understanding is critical for managers as it enables them to identify areas for cost reduction, improve pricing strategies, and better allocate resources. By analyzing how costs fluctuate with different activities, companies can make more informed decisions about product lines, operational efficiencies, and overall financial strategy. This enhances the accuracy of cost management and ultimately contributes to improved profitability.