Activity Based Costing Definition Verified -

Splits the $1,000 based on production volume . If Pens make 90% of units and Watches 10%, Pens get $900, Watches get $100. Result: Pens are overcosted; Watches are undercosted.

| Term | Definition | Example | | :--- | :--- | :--- | | | The final product, service, or customer you want to cost. | A specific smartphone model, a car repair, or a bank account. | | Activity | Any event, task, or unit of work with a specific goal. | Setting up a machine, processing a purchase order, testing a component. | | Cost Driver | The factor that causes the cost of an activity to increase or decrease. | Number of machine setups, number of purchase orders, number of quality tests. | activity based costing definition

Unlike traditional costing methods that allocate overhead based on a single volume metric (like labor hours or machine hours), ABC recognizes that specific products or services may consume resources differently. It assigns costs based on the "cause and effect" relationship between activities and costs. Splits the $1,000 based on production volume

: Developed in the 1980s to address inaccuracies in traditional costing that often overcharged high-volume products while undercharging complex, low-volume ones. | Term | Definition | Example | |

is an accounting method that assigns overhead and indirect costs—such as salaries, utilities, and supplies—to products and services based on the actual activities required to produce them.

is a precision-focused managerial accounting method that assigns overhead and indirect costs to products and services based on the specific activities required to produce them.