Activity Based Costing - Introduction

Introduction to Activity Based Costing

Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities.

Simple right?

The method is the same like absorption costing but the costs are absorb logically into relevant activities. Like what the video says, it is not logical to absorb and allocate cost of overheads to all activity at the same rate. Then the unit cost of the product will be different and maybe end up a bit higher. Therefore, it will somehow influence the decision to set the selling price.