Activity-based costing (ABC) is a method of allocating costs to products and services. It is generally used as a tool for planning and control. Instead of using broad percentages to allocate costs, ABC allows managers to attribute costs firstly to activities. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products.
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Wikipedia: Activity-based costing
