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Accounting
Activity-Based Costing
A method that assigns overhead costs to products based on the actual activities that drive those costs.
Traditional costing often overcosts simple products and undercosts complex ones. ABC gives managers a more accurate picture of true product profitability and helps with pricing and product mix decisions.
It's like charging each friend exactly how much pizza they ate instead of splitting the bill equally.
Real world: A factory makes both simple pens and fancy engraved pens. Activity-based costing shows that the fancy pens use far more machine setup time, so they should carry more overhead cost.
💡 Activity-based costing shows you which products are actually making you money.