Activity Based Costing

Why do some products seem to eat up your budget more than others, activity based costing might hold the answer.  This isn’t your average number-crunching method, it’s a smarter way to understand where your money really goes.

So let’s understand what activity based costing really is.

What is Activity Based Costing? 

Activity-based costing is a method that assigns costs to products or services based on the resources they consume.  

Instead of spreading overhead evenly, this system looks at the actual activities involved in production and assigns costs based on usage. 

This approach is especially helpful in industries where products or services require different amounts of resources, like manufacturing, logistics, or warehousing. 

How Does the Activity Based Costing ABC Method Work? 

The Activity Based Costing ABC method breaks down your processes into individual tasks or activities, like packing, labeling, shipping, and tracks the cost of each.  

Once you know how much each activity costs, you can assign those costs to the products that use them. 

This means you’re no longer just guessing based on volume or sales, you’re calculating based on real use. 

Activity Based Costing Formula 

Here’s a simple way to understand the activity based costing formula: 

Total Activity Cost ÷ Total Activity Driver Units = Cost per Unit of Activity 

Then multiply the cost per unit by the number of activities a product uses. It’s straightforward and gives a much clearer picture of true costs. 

Why It Matters 

Knowing your real costs helps you: 

• Price products accurately 

• Identify inefficient processes 

• Make better business decisions 

It’s especially useful for businesses like Newl, where logistics services involve many moving parts.  With accurate cost tracking, we’re able to offer fair pricing while keeping operations lean.

Get in touch for more information about how we handle your inventory at our warehouses!

Frequently Asked Questions

1. Can activity based costing be used in service industries?

Yes! While it started in manufacturing, it’s widely used in services too, like accounting firms, logistics companies, and even healthcare, to track resource-heavy tasks.

2. What systems can help automate activity based costing?

ERP systems and WMS platforms often include ABC modules to automate data collection and calculations, saving time and increasing accuracy.

3. Is activity based costing better than traditional costing?

It depends on your business. If you have complex operations with many indirect costs, ABC provides a clearer picture. For simpler setups, traditional costing may suffice.