Cost Accounting/ Activity Based Costing (ABC)

A method of accounting which provides for accumulating and recording of all the elements of cost incurred to accomplish a purpose, to carry on an activity or operation, or to complete a unit of work or a specific job. Cost accounting approach concerned with matching costs with activities (called cost drivers) that cause those costs. It is a more sophisticated kind of absorption-costing and replaces labor based costing system. ABC states that (1) products consume activities, (2) it is the activities (and not the products) that consume resources, (3) activities are the cost drivers, and (4) that activities are not necessarily based on the volume of production. Instead of allocating costs to cost centers (such as service delivery, marketing, finance), ABC allocates direct and indirect costs to activities such as processing an order, attending to a customer complaint, or delivering a service