Activity-based costing (ABC) aids in accurately assigning overhead costs to products, customers and other objects in a way that is more correlated to cost drivers than traditional overhead allocation methods. The definition of cross-functional business processes, in addition to the functional cost center standpoint, opens a further dimension of overhead transparency in cost accounting.
ABC, in contrast to traditional cost accounting, allows a more realistic profitability analysis of different products and customers, because the resources of overhead areas can also be taken into account via process consumption by market segments using the related business processes.
Some ABC system features include:
- Refining costing systems by focusing on individual activities as fundamental cost objects
- Calculating the costs of individual activities and assigning costs to cost objects – such as products and services – on the basis of the activities undertaken to produce each product or service