Activity Based Costing
Activity-Based Costing (ABC) assigns indirect costs and overhead to products, services, or customers based on the activities that consume resources. In supply chain and warehousing, it traces receiving, put-away, picking, storage, packing, and shipping costs to actual drivers such as purchase orders, line items, pallets, pick lines, or shipments, providing a more accurate view of SKU, batch, or customer profitability.
On a real shop floor, ABC implementation begins by grouping overhead and indirect resource costs into activity cost pools, then allocating those pools to jobs through cost drivers such as setups, inspections, material moves, and pick lines. A plant can therefore assign setup labor, machine calibration, quality inspection, and scheduling effort to the specific jobs that trigger them, rather than spreading the costs evenly across every unit produced. In warehousing, the same logic separates receiving, storing, picking, and shipping costs by SKU class or customer profile and normalizes them by actual volume handled or shipped. For raw material tracking, ABC exposes the true cost of supplier qualification, inbound inspection, lot tracing, labeling, and material moves, which matters when some materials require far more handling than others. This reveals items that look profitable under standard costing but actually consume disproportionate labor, equipment time, or storage space, making cost-to-serve visible and actionable.
What is the core formula in Activity-Based Costing?
For each activity pool, calculate the activity rate as total cost pool divided by total cost driver quantity, then multiply that rate by the driver usage for the product, batch, or customer.
Why is ABC more accurate than traditional absorption costing?
ABC links overhead to the actual causal activities that generate it rather than allocating overhead using a single base such as direct labor hours or machine hours, so cost assignments better reflect resource consumption.
What are common supply chain cost drivers in ABC?
Purchase orders, receipts, line items, storage days, pick lines, setups, inspections, shipments, and delivery stops are commonly used drivers in logistics and manufacturing environments.