## Activity Based Costing (ABC) — Introduction
### The problem with Traditional Costing
Under the Traditional Costing System, overhead costs are grouped under a cost centre and then absorbed into product costs on a single volume-based measure — direct labour hours, machine hours, volume, etc. This is not accurate enough for pricing or long-run management decisions, because it assumes all overheads vary with volume.
### What ABC is
- ABC is a modern absorption costing method evolved to give more accurate product costs.
- It is an accounting methodology that assigns costs to activities rather than directly to products or services.
- It identifies cost with each cost-driving activity and uses that as the basis for apportioning costs over different cost objects — jobs, products, customers, or services.
### Steps Involved in ABC
1. Identify Activities — primary activities and support activities.
2. Form a Cost Pool for each activity and reapportion support activities to primary activities.
3. Determine the Cost Drivers.
4. Compute Activity-wise Cost Driver Rate.
5. Compute the Activity Cost for the cost object.
> Core shift: Traditional costing relates overheads → cost centres → products. ABC relates overheads → activities → cost objects, recognising that activities (not just volume) drive cost.