Idea behind Activity-Based Costing

The most important ideas behind activity-based costing are as given as:

1. Activities cause costs; activities involve ordering, machining, materials handling, assembly, production dispatching and scheduling,
2. Products make demand for the activities
3. Costs are assigned to products upon the origin of a product's consumption of the activities.

Therefore absorption rates under ABC should be more closely linked to such cause of overhead costs and hence product costs should therefore be more realistic especially where support overheads are high.