How does Activity Based Costing enhance business processes?

Activity-Based Costing (ABC) enhances business processes primarily by analyzing cost drivers to minimize non-value-adding activities. In essence, ABC provides a more accurate method of costing products or services by identifying the specific activities that incur costs and tying those costs directly to the activities that consume resources.

By focusing on cost drivers—essentially the factors that contribute to the costs of specific activities—businesses can gain insights into where they are spending more than necessary. This analysis helps organizations identify and eliminate non-value-adding activities, which do not contribute to the customer’s perceived value of the product or service. As a result, companies can streamline their processes, reduce waste, and improve efficiency, ultimately leading to lower costs and improved profitability.

This method stands in contrast to traditional costing methods that may allocate costs more broadly without considering the actual activities involved, which can obscure inefficiencies and opportunities for improvement.