Introduction to Activity Based Costing

The Activity-Based Costing (ABC) is a costing system, which focuses on activities performed to produce products. ABC is that costing in which costs are first traced to activities and then to products. This costing system assumes that activities are responsible for the incurrence of costs and create the demands for activities. E.g. an accounting firm prepares tax returns; a University teaches students. Costs are charged to products based on individual product’s use of each activity. In traditional absorption costing system, costs are first traced not to activities but to an organizational unit, such as department or plant and then to products. It means under both, ABC and traditional absorption costing system the second and final stage consists of tracing costs to the product.