Activity based costing (ABC) is a method that identifies cost pools or activity centres in a business or organization. It assigns costs to products and services based on the transactions involved in the process of providing the products or services.
Activity based costing recognizes the relationship between services and products, and their respective activities and costs. Through this relationship, ABC assigns indirect costs to products or services less arbitrarily than traditional costing methods.
Activity based costing is a prerequisite step in developing an activity based budget.
ABC is particularly useful in costing products and services as well as value of customers.
In order to effectively implement activity based costing, familiarity with activity based budgeting (ABB) is important.