What is activity based costing?

Activity based costing traces costs to activities. This defers from traditional costing systems, where costs are traced to the product. Direct costs are traced directly to the cost object. Indirect costs are allocated based of the activities (Cost driver) and the cost of the activities. Individual activities = cost objects ABC-costing is advantageous for: • Companies with a large product portfolio and diversification • For companies with many indirect costs, such as maintenance, product development, advanced IT support and other services. • For companies with an advanced complicated customer portfolio.