What is ABC analysis?
Activity Based Costing is a two-stage approach used in managerial accounting. In regular accounting costs are distributed to centers or departments (allocating to centers based on a manager’s best guess). ABC uses “activities” to accumulate costs. ABC is a method used to determine which activities are actually using the resources (costs) for a company’s departments, products and even customers. An ABC cost system attempts to determine what activities drive actual costs instead of applying an allocation method. It tries to be more accurate than a manager’s best guess by looking at cost drivers like the duration of an activity, intensity of an activity, or number of transactions. ABC systems attempt to find the “roughly right” cost of producing products, services, or maintaining customers. The information gathered from ABC systems help managers to make more informed and hopefully better decisions regarding the business.
