Activity Based Costing vs Traditional Costing

Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. Therefore this model assigns more indirect costs (overhead) into direct costs compared to conventional costing.What is the purpose of Activity Based Costing? Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them.What are the steps in Activity Based Costing? Step 1: Identify the products that are the chosen cost objects. Step 2: Identify the direct costs of the products Step 2: Identify the direct costs of the products. Step 3: Select the activities and cost-allocation bases to use for allocating indirect costs to the products for allocating indirect costs to the products.What are the elements of Activity Based Costing? Activity-Based Management Modeling Components Resources. Resources—such as people, facilities, and costs associated with people and expenses—are the economic elements consumed while performing activities. ... Activities. Activities consume resources and drive costs to cost objects. ... Cost Objects. ... Ledger Mappers. ... Drivers. ... Pointers.