Activity Based Costing

Activity based costing is an accounting technique that identifies all the activities that took place in an organization (which aids the process of production) and accordingly assigns cost of each activity to all products and services. The basic concept behind this method is that an activity causes an organization to incur expenditure. Once all the costs associated with the activities have been identified and cost of each activity has been determined, the cost of the activities is then charged to all products and services. This accounting method is more logical for allocating overhead than simply charging costs to products/ services based on direct labor hours or machine hours.