Editing Cost accounting (section)

==Activity-based costing==
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[[Activity-based costing]] (ABC) is a system for assigning costs to products based on the activities they require. In this case, activities are those regular actions performed inside a company.<ref>Performance management, Paper f5. Kaplan Publishing UK. Pg 6</ref> "Talking with the customer regarding invoice questions" is an example of activity inside most companies.

Companies may be moved to adopt ABC by a need to improve costing accuracy, that is, understand better the true costs and profitability of individual products, services, or initiatives. ABC gets closer to true costs in these areas by turning many costs that standard cost accounting views as indirect costs essentially into direct costs. By contrast, standard cost accounting typically determines so-called indirect and overhead costs simply as a percentage of certain direct costs, which may or may not reflect actual resource usage for individual items.

Under ABC, accountants assign 100% of each employee's time to the different activities performed inside a company (many will use surveys to have the workers themselves assign their time to the different activities). The accountant then can determine the total cost spent on each activity by summing up the percentage of each worker's salary spent on that activity.

A company can use the resulting activity cost data to determine where to focus its operational improvements. For example, a job-based manufacturer may find that a high percentage of its workers are spending their time trying to figure out a hastily written customer order. Via (ABC) Activity-based costing, the accountants now have a currency amount pegged to the activity of "Researching Customer Work Order Specifications". Senior management can now decide how much focus or money to budget for resolving this process deficiency. [[Activity-based management]] includes (but is not restricted to) the use of activity-based costing to manage a business.

While (ABC) Activity-based costing may be able to pinpoint the cost of each activity and resources into the ultimate product, the process could be tedious, costly and subject to errors.

As it is a tool for a more accurate way of allocating fixed costs into a product, these fixed costs do not vary according to each month's production volume. For example, the elimination of one product would not eliminate the overhead or even direct labour cost assigned to it. Activity-based costing (ABC) better identifies product costing in the long run, but may not be too helpful in day-to-day decision-making.