activity-based costing

Definition

An accounting method that assigns overhead costs to products based on the activities that actually drive those costs, rather than arbitrary allocations like direct labor hours. It's acknowledging that not all products consume resources equally, which revolutionized cost accounting but requires painful implementation.

Example Usage

Activity-based costing revealed that the company's flagship product was actually losing money once all overhead was properly allocated.

Origin

Developed in the 1980s by academics and consultants as traditional cost accounting became obsolete in complex manufacturing

Fun Fact

ABC implementations often fail because they require detailed tracking of activities and employee time—turning accountants into hall monitors.

Source: Managerial and cost accounting methodology

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