Unlike traditional costing methods, which treat overhead as a single lump sum (often allocating based on labor hours or machine hours), ABC recognizes that "activities" are the drivers of cost. The fundamental premise is that products consume activities, and activities consume resources. Therefore, to calculate the true cost of a product, one must trace the expense of the resources back to the specific activities required to produce it.
is a costing methodology that assigns overhead and indirect costs to specific products, services, or customers based on the activities consumed by each cost object. Instead of using broad, arbitrary allocation bases (like machine hours or direct labor), ABC traces costs through causal relationships. abc costing definition