Activity Based Costing & Activity Based Management

Activity-based costing (ABC) is mostly used in the manufacturing industry since it enhances the reliability of cost data, hence producing nearly true costs and better classifying the costs incurred by the company during its production process.

• Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services.

• The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal.

• An activity is a cost driver, such as purchase orders or machine setups.

• The cost driver rate, which is the cost pool total divided by cost driver, is used to calculate the amount of overhead and indirect costs related to a particular activity.

ABC is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy.

Activity-based management (ABM) is a system for determining the profitability of every aspect of a business so that its strengths can be enhanced and its weaknesses can either be improved or eliminated altogether.

Activity-based management (ABM), which was first developed in the 1980s, seeks to highlight the areas where a business is losing money so that those activities can be eliminated or improved to increase profitability. ABM analyzes the costs of employees, equipment, facilities, distribution, overhead, and other factors in business to determine and allocate activity costs.