What role does Activity Based Costing play in decision-making?

Activity Based Costing (ABC) plays a critical role in decision-making by providing essential cost information that allows businesses to understand the true costs associated with their products, services, and processes. This methodology allocates overhead costs more accurately based on actual activities that drive costs, rather than merely distributing them uniformly across products or departments.

By using ABC, organizations can identify which products or services are more profitable and which ones are consuming more resources than they generate in revenue. This insight aids in strategic decisions such as pricing, product line evaluations, process improvements, and resource allocation.

The focus on identifying and analyzing the costs related to specific activities enables more informed decision-making, ultimately leading to optimized operations and increased profitability. This level of detailed cost information supports management in making high-stakes decisions based on a clearer understanding of cost drivers and profitability, which is particularly valuable in competitive environments.