Activity Based Costing

A cost methodology that assigns costs to activities and cost objects based on the consumption of resources rather than the traditional costing approach in which costs are allocated to products based on some arbitrary bases such as labor. Activity Based Cost System describes various activities (e.g., unit-level, batch-level, product-level, customer-level, and facility-level) that drive a company's costs. The integration of Activity Based Cost System into a Cost-Volume-Profit (CVP) model thus recognizes the existence of multiple cost drivers, resulting in the production of better information for management.