What is activity-based costing (ABC)?

Activity-based costing (ABC) is a method that provides a more accurate understanding of costs by assigning overhead and indirect costs to specific activities within the production process. This approach involves analyzing various activities that contribute to the production and identifying how resources are consumed by these activities. Instead of spreading overhead costs evenly across all products, ABC recognizes that different products or services consume overhead resources in different amounts.

This method enhances decision-making by allowing managers to see which activities are cost-effective and which are not, leading to more informed strategic decisions regarding pricing, product lines, and process improvements. By focusing on the specific activities that drive costs, ABC helps organizations identify areas for cost reduction and efficiency improvements.

In contrast, the other options describe methods that do not reflect the principles of ABC. For instance, ignoring overhead costs or assigning all costs to one cost object does not provide the granularity of information that ABC aims for. Additionally, a focus on fixed costs in budgeting systems does not align with the primary objective of ABC, which is to accurately assign costs based on specific activities rather than overall cost categories.