What is the first step in the activity-based costing process?

In the activity-based costing (ABC) process, the first step is to identify activities and estimate manufacturing overhead costs. This foundational step involves analyzing the various activities that contribute to the production process and determining which of these activities incur costs. By understanding the specific activities involved, a company can develop a clearer picture of where resources are being consumed and how costs are driven by these activities.

Identifying activities allows for a more accurate allocation of overhead costs based on the actual consumption of resources. Estimating manufacturing overhead costs at this stage ensures that the data used in subsequent steps reflects the true cost structure of the organization's processes. It sets the groundwork for more effective decision-making regarding pricing, budgeting, and efficiency improvements. This approach ultimately leads to a more precise understanding of product costs, which can enhance profitability and operational effectiveness.