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ABC, developed by Kaplan and Cooper’s approach to ABC, is a methodology for assigning overhead costs more accurately based on resource consumption. Unlike traditional cost systems, which assume all costs vary with production volume, ABC considers various cost drivers to allocate expenses properly
Activity identification: Identifying major activities causing costs.
Cost pools & drivers: Grouping related costs and determining how they drive expenses.
Cost allocation: Charging overheads based on activity consumption rather than arbitrary measures.
ABC categorizes costs into four levels:
Unit-level: Costs vary per unit produced (e.g., materials, labor).
Batch-level: Costs incurred per batch (e.g., machine setups).
Product-sustaining: Costs required to support a product line (e.g., design).
Facility-sustaining: Costs related to maintaining infrastructure (e.g., security, rent).
A manufacturing company might identify machine setup times as a major cost driver. To lower this cost, they could:
Streamline processes – Implement standardized procedures to reduce setup time.
Invest in automation – Using advanced machinery to cut manual setup time.
Optimize batch sizes – Reducing the frequency of setups by consolidating production runs.
ABM utilizes ABC insights to enhance efficiency by identifying non-value-added activities and reducing waste. Businesses leverage ABM for cost control, performance improvement, and customer profitability analysis.
For additional insights, refer to the full Activity-Based Costing PDF attached below.
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