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Activity Based Costing (ABC) analysis is a methodology for assigning costs to those activities that truly drive these costs. It is more accurate than traditional costing methods. It is a valuable technique to know for a number of key reasons:
* ABC allows you to develop a picture of the true profitability of product lines, customer segments, distribution channels, geographies, and other market segments.
* ABC aids in a number of strategic decisions, from determining target markets to selecting the optimal product mix to making informed pricing decisions.

Specifically, ABC leads to a more accurate assignment of costs to cost objects through a process of:
* Matching the logical flow of costs through the cost system to the economics of true cost flows.
* Mapping costs from "resources" (e.g. wages paid, supplies purchased) to activities performed (e.g. units manufactured) to cost objects (e.g. products, customers, distribution channels) that drive those costs.

ABC is an invaluable tool for making strategic decisions, as it allows you to develop a picture of true profitability of product lines, customer segments, geographies, distribution channels, and other markets. This document explains a 7-phase approach to Activity Based Costing and includes examples.

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Activity Based Costing

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