What is the main purpose of activity-based costing?

The main purpose of activity-based costing (ABC) is to assign costs based on the specific activities required to produce a product or provide a service. This method differs from traditional costing systems that might allocate overhead costs more broadly, often leading to less accurate product cost information. ABC allows organizations to identify the true cost drivers and understand which activities consume resources, giving them better insights into profitability and efficiency.

By focusing on the activities that incur costs, companies can pinpoint areas where they can improve processes, eliminate waste, and make more informed pricing and product mix decisions. This approach enables managers to accurately assess the profitability of individual products or services and make strategic decisions based on more precise data. Overall, this contributes to more effective cost management and resource allocation within the organization.