There are a host of benefits underlying activity-based costing, but its distinct advantage over other forms of costing is that it reveals exactly how much overhead is used in each business activity. This makes the latter a good tool to use when building an activity-based budget.

While the two are complimentary, they are different entirely.Īn activity-based budget is a form of budgeting while activity-based costing is an accounting methodology to allocate expenses to activities. This should not be confused with activity-based budgeting, which is budget driven by the costs of business activities. In this way, it is a helpful tool for benchmarking a business’s costs against industry standards. This means it is not the best approach in more streamlined and simple environments.Īctivity-based costing is an approach that is used to track the cost of business activities. Once a cost driver is associated with an activity, the expenses can then be assigned to the cost objects that use those activities-for example, a manufactured good, service, or other product that utilizes the cost objects.Īctivity-based costing is an approach that yields more benefit in environments where processes are intertwined and complex. What Is Activity-Based Costing?Īctivity-based costing is an accounting methodology that attempts to allocate overhead and indirect costs to specific business activities. In this FAQ, we will discuss what activity-based costing is, why it is important, and how to do it. However, the costing method has other practical applications in a wide variety of industries. Typically, activity-based costing is used in manufacturing businesses where indirect costs can be allocated to a unit of production. Traditional costing methods and approaches to budgeting arbitrarily allocate costs, often adjusting them based on prior years’ values.Īctivity-based costing takes allocation of expenses a bit further and works to allocate indirect costs in a more structured way. One of the more challenging aspects of creating an activity-based budget is how to include costs for activities not directly related to products and services.

Activity based costing example