activity-based costing

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A system of cost allocation proposed by Professors Johnson and Kaplan in their book Relevance Lost: The Rise and Fall of Management Accounting (1987), in which they questioned accounting techniques based on absorption costing. Their method recognizes that costs are incurred by each activity that takes place within an organization and that products (or customers) should bear costs according to the activities they use. Cost drivers are identified, together with the appropriate activity cost pools, which are used to charge costs to products. Adherents of activity-based costing maintain that it provides accurate cause-and-effect allocations of costs that cannot be obtained from traditional costing systems.

Subjects: Accounting.

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