Activity-Based Costing (ABC)

A costing system that identifies the various activities performed in a firm and uses multiple cost drivers (non-volume as well as the volume based cost drivers) to assign overhead costs (or indirect costs) to products. ABC Costing considers the impact and relationship of cost drivers with activities performed.

Example: Every “widget” you produce was sitting in a building that you are paying for. Therefore every “widget” has cost added to it by virtue of it being in your plant. Consider also the electricity, water, air conditioning, etc. that have an impact on every product you produce.