Activity-based Costing (ABC)

Activity-based Costing (ABC)

An activity-based approach refines a costing system by focusing on individual activities as the fundamental cost objects. It uses the cost of these activities as the basis for assigning costs to other cost objects such as products or services.

There are four levels of a cost hierarchy: 1- Output unit-level costs: costs of activities performed on each individual unit of a product or service. 2- Batch-level costs: costs of activities related to a group of units of products or services rather than to each individual unit of product or service. 3- Product-sustaining costs or service-sustaining costs: costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced. 4- Facility-sustaining costs: costs of activities that cannot be traced to individual products or services but support the organization as a whole.

|Activity center |Unit-level |Batch-level |Product-level |Facility-level |
| |Activity |Activity |Activity |Activity |
|Parts inventory management. | | |× | |
|Labour-related |× | | | |
|Plant occupancy | | | |× |
|Purchase order | |× | | |
|Machine-related |× | | | |
|General factory | | | |× |
|Product prototype testing |