What is the main objective of Activity Based Costing?

Activity Based Costing (ABC) primarily aims to improve product costing by providing a more accurate method for allocating overhead costs to specific products or services. Traditional costing methods often allocate overhead based on a single measure, such as machine hours or direct labor, which can lead to distorted product costs. ABC, on the other hand, identifies activities within an organization and assigns costs to products based on their actual use of those activities.

This method allows organizations to have a clearer understanding of the true cost of their products. By analyzing the various activities that contribute to production, businesses can pinpoint which activities drive costs and how they affect overall profitability. This leads to better decision-making regarding pricing, product lines, and resource allocation.

While maximizing profit margins, reducing overhead costs, and identifying supply chain inefficiencies are important aspects of financial management, these are not the primary focus of Activity Based Costing. Instead, ABC emphasizes the accuracy of product costing, which in turn can indirectly lead to improvements in profits, cost reduction strategies, and operational efficiency.