ABC is for every business. It is most valuable when:

| Cost Pool (Activity) | Total Cost | Cost Driver | Chairs (usage) | Cabinets (usage) | | :--- | :--- | :--- | :--- | :--- | | Machine Setup | $100,000 | # of setups | 10 setups | 90 setups | | Quality Inspection | $80,000 | # of inspections | 200 inspections | 800 inspections | | Material Handling | $50,000 | # of moves | 50 moves | 150 moves |

Under traditional costing, Cabinets looked cheaper to make than they really are. ABC reveals their true cost—and shows that Chairs are actually more profitable than previously thought.

| Feature | Traditional Costing | Activity Based Costing | | :--- | :--- | :--- | | | Simple allocation of overhead. | Precise allocation based on cause-and-effect. | | Cost Drivers | Limited (usually 1 or 2, e.g., Labor Hours). | Multiple (based on specific activities). | | Accuracy | Lower accuracy; high risk of cross-subsidization. | Higher accuracy; reflects true resource consumption. | | Complexity | Simple to implement and maintain. | Complex and data-intensive to implement. | | Best Use Case | Companies with high direct labor costs and low overhead. | Companies with high overhead and diverse product lines. |

is a costing method that assigns overhead and indirect costs to specific products or services based on the actual activities that drive those costs.