What is the focus of activity-based costing (ABC)?

Activity-based costing (ABC) focuses on allocating costs based on the resources consumed by activities, making it a more precise method of cost allocation compared to traditional costing systems. In ABC, costs are traced to specific activities or tasks that generate overhead costs and are then assigned to products or services based on their usage of those activities. This allows organizations to gain a clearer understanding of where and how resources are consumed, enabling them to identify areas for cost reduction and efficiency improvements.

The method emphasizes the relationship between activities and the costs incurred, thus providing a more accurate picture of the cost structure and helping managers make informed decisions regarding pricing, budgeting, and resource allocation. By using ABC, businesses can better understand the true profitability of products or services, especially in complex environments with diverse products and services that consume varying levels of resources.