Unlike traditional systems that often apply a "one-size-fits-all" overhead rate based on volume, ABC recognizes that different products consume resources in vastly different ways. Core Components of ABC
Splits the $1,000 based on number of setups (the actual activity). Pens need 1 setup (cost $100), Watches need 9 setups (cost $900). Result: Watches are correctly assigned higher costs because they consume more setup activity. activity based costing definition
: An accounting process that assigns costs to "cost objects" (products, services, or customers) based on the specific activities required to produce or deliver them. activity based costing definition