Cost Accounting

Activity-based costing (ABC) is a cost management approach that identifies the processes involved in supplying a product or service and the resources that these processes consume. It uses this information to assign costs, eliminate waste, and improve processes. ABC is a powerful tool to understand the components of a company’s costs and their underlying causes. By focusing on the causal factors or cost drivers, ABC can help identify opportunities for cost reduction.
Activity-based management (ABM) is a discipline that focuses on the management of activities to improve continuously the value that customers receive. It draws on ABC as a major source of information. ABM complements a continuous improvement philosophy by highlighting waste and opportunities for cost reduction.
When is ABC Appropriate?
ABC is recommended when one or more of the following situations occur:
• The products are diverse.
• Overhead costs are relatively high.
• Production volu...