Activity-based costing

Activity-based costing assigns overhead to products by first grouping costs into activity pools — such as machine set-ups or quality inspections — and then applying a separate driver-based rate to each pool.

Also known asABC

ByHoang TruongUpdated June 30, 2026

FrameworkActivity-based costing (ABC)

See it move

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A three-step flow shows all indirect manufacturing costs gathered on the left, then grouped by activity into cost pools — including a set-ups pool of €50,000, an inspections pool, and a machine-running pool — each divided by its own driver. Products on the right are charged only for the activities they actually consume, replacing the distortions of a single blanket overhead rate.

Where it fits

SubjectCost AccountingCoreTopicOverhead Allocation & ABCCore

The formula

LaTeX

r_{act} = \frac{C_{pool}}{D}

Variables

$r_{a c t}$: Activity rate (€ per driver unit)
$C_{p oo l}$: Budgeted activity pool cost (€)
$D$: Budgeted quantity of activity driver (driver units)

Each activity pool carries its own rate, replacing the single volume-based rate used in traditional costing.

LaTeX

OH_{product} = r_{act} \times d_{product}

Variables

$O H_{p r o d u c t}$: Overhead assigned to the product (€)
$r_{a c t}$: Activity rate (€ per driver unit)
$d_{p r o d u c t}$: Activity driver units consumed by the product (driver units)

Products that consume more of an activity bear more of that activity's cost.

Check yourself

PracticeCORE

A factory has two overhead pools: a machine-running pool of €60,000 driven by 3,000 machine-hours, and a set-up pool of €24,000 driven by 80 set-ups. A product batch uses 200 machine-hours and requires 4 set-ups. What is the total overhead charged to the batch under activity-based costing?

Select an answer to check your understanding.