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What is Activity Based Costing?

Date: 08/17/2006 | Category: Business | Author: Claire Reid

  

Activity Based Costing or ABC is a method which tries to determine final cost of a product taking into account the processes, cost elements and unit costs. ABC is different from traditional costing methodology in one sense – ABC tries to explore avenues of production efficiency and deliver the true cost to management. 

But is Activity Based Costing useful for small business owners? The answer is firm yes. Small business owner can be fully rewarded if one is able to clearly understand and implement the principles of ABC. 

Activity Based Costing methodology is divided into four stages – activity identification, individual activity costing, activity output measurement and correlating input costs with outputs. For example, cost of selling a product unit is $10. Small business owner should divide the selling process into various activities and assign input cost to each of the activities. One should then be able to quantify or measure the output from each of the activities. Once this is achieved, the small business owner can easily ‘match’ the input costs with output. This way, ABC can be implemented.

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