Activity–based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. Activity based costing (ABC) is a methodology for more more precisely allocating overhead to those items that actually use it.
Applications of activity based costing system will be more appropriate where:
- Overheads form high proportion of total cost
- More than one product is made
- Different products results in different levels of activities and resource consumption
- Overhead expenditure is not driven by volume of output, but by the complexity and diversity of operation for example banking, airline