ABC costing (activity-based costing)

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:

1. Identify the business’ main activities.
2. Identify the activities’ cost drivers -- processes and activities that determine what a given activity costs the business, such as the number of orders.
3. Assess the costs that go into each activity.
4. 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.