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Key MBA Models by Dr. Julian Birkinshaw, Ken Mark

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Activity-based costing

Activity-based costing (ABC) is a methodology for assigning costs to products or services based on the resources they actually consume. Before ABC was invented, overhead costs were typically assigned to product lines as a proportion of direct costs, such as labour hours. This was a simple way of doing things, but it often led to inaccuracies in assessing how much items actually cost to manufacture. ABC resolves those inaccuracies.

When to use it

  • To get an accurate picture of the costs of manufacturing individual products.
  • It is particularly valuable in a complex production environment where many products use the same inputs.

Origins

The concept of ABC originates in work by George Staubus on activity costing and ...

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