Activity-based costing (ABC costing) is a method used to arrive at a cost price for a product – the total of direct and indirect costs required for production -- by identifying and costing all associated business activities.
A brief example of how to conduct ABC costing:
- Identify the business’ main activities.
- Identify the activities’ cost drivers -- processes and activities that determine what a given activity costs the business, such as the number of orders.
- Assess the costs that go into each activity.
- Assign product costs based on rates of use of each activity.
ABC costing management software is available from a number of vendors including Acorn Systems, proDaCapo and QPR CostControl. Activity-based costing is also a component of many enterprise resource planning (ERP) and corporate performance management (CPM) products.
ABC costing is considered a supplemental costing method rather than sufficient unto itself.