What is activity-based costing and how is it performed?
What will be an ideal response?
Activity-based costing (ABC) is a budgeting method that assigns costs first to activities and then to the projects based on each project's use of resources. It is based on the notion that projects consume activities and activities consume resources. Activity-based costing consists of four steps:
Identify the activities that consume resource and assign costs to them as is done in a bottom-up budgeting process.
Identify the cost drivers associated with the activity.
Compute a cost rate per cost driver unit or transaction.
Assign costs to projects by multiplying the cost driver rate times the volume of cost driver units consumed by the project.
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