illuminates exactly what activities are associated with serving a particular customer and how these activities are linked to revenues and the consumption of resources.

Activity based costing

Explanation:

Activity based costing is defined as a method of costing that identifies the activities involved in production in an organisation, and assign cost of the activity to the product.

It provides an objective way of assigning cost. Activities that contribute more to the production of a product will have a higher cost assigned to that product.

Manufacturing companies more accurately assign overhead cost to products.

For example machine hours can be used as a cost driver in the production process. The higher the machine hours of a process the higher the cost of that process assigned to the product.

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