Activity Based Costing ABC
Traditional costing splits the bill equally among everyone's pockets; Activity-Based Costing individually calculates who ate what, exposing hidden losses.
Activity-Based Costing (ABC) is a scientific approach that, instead of blindly distributing overhead manufacturing expenses (electricity, maintenance, quality control) to products based on volume, reflects them according to the activities that genuinely consume that resource. An electricity bill is charged to a product not merely by the number of units produced, but by how many hours that product kept the machine running during its creation. Through this system, the unjust structure where simple, high-volume products subsidize (secretly support) complex, low-volume products is dismantled. For someone learning finance from zero, the logic of ABC provides the power to detect how a product they thought was profitable is actually bankrupting the company.
