ACTIVITY BASED ACCOUNTING (MEANING AND DEFINITION)

MEANING AND DEFINITION

• Activity Based Costing is an accounting methodology that assigns costs to activities rather than products or services. 
• This enables resources & overhead costs to be more accurately assigned to products & services that consume them. ABC is a technique which involves identification of cost with each cost driving activity and making it as the basis for apportionment of costs over different cost objects/ jobs/ products/ custom- ers or services. 
• ABC assigns cost to activities based on their use of resources. It then assigns cost to cost objects, such as products or customers, based on their use of activities.
•  ABC can track the flow of activities in organization by creating a link between the activity (re- source consumption) and the cost object. 
• CIMA defines ‘Activity Based Costing’ as “An approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.”