The traditional system of costing suffers from certain limitations. It fails to precisely assign the overheadcosts into product units. Therefore activity-based costing system has recently been developed to overcome the limitations of traditional costing system. The activity costing system is based on premise that activities make a product.
Activity- based costing (ABC) is the determination of product cost based on the activity needed for producing a product. The activities required to produce a product or render service consume a cost. Therefore, an insight into the expenses consumed by all those activities performed for the manufacturing of finished products and sale is very important. A number of researched studies have shown the increasing utility of activity-based costing on overheads allocation and apportionment for product cost determination.
Product cost determination under activity-based costing is made on the basis of cost driver required for producing goods or delivering services. Activity-based costing is becoming more effective in costing of multi-products produced by industries and executing customers' orders.
Activity-based costing (ABC) is an effective management approach for distributing and controlling the overhead costs. Overhead analysis can be made more accurate by using ABC techniques for a wide range of products, for product costing and profitability analysis and for distribution and control of the overheads appropriately.