Activity-based costing (ABC)
is a potentially complex management accounting system that assigns costs to products based on the cost of all the activities connected with that product – including purchasing, set-up times etc. ABC should recognise the true cost of diversity and non-standard products (typically higher than under standard costing).
A management accounting system which allocates costs to products based on the number of machine hours and labour hours available to a production department during a given period of time, with a cost calculated to absorb the overheads at the expected level of activity. Much simpler than activity-based costing to implement, standard cost systems can however give perverse incentives by encouraging managers to produce for stock so as to increase the utilisation rate.