activity based costing

Costing method that aims to provide a dynamic and realistic method of calculating the true cost of doing business. ABC was developed at Harvard Business School and is particularly associated with Harvard professor Robert Kaplan, the inventor of the balanced scorecard.

A company identifies core processes, using ABC to analyse the direct and indirect costs incurred at each stage of the process. In this way, ABC allows a company to determine what proportions of a product's total cost each process constitutes. Carried out well, ABC gives companies the opportunity to understand and streamline cost structures. It does, however, require an in-depth study of all business processes.