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Activity Based Costing .

Fact Sheet | October 14, 2020

Activity-based costing (ABC) is a methodology that identifies activities in an organization and determines the cost associated with a specific commodity for each of those activities. ABC develops strong operational skills and definitive key performance indicators (KPIs).

This document provides an overview of activity-based costing, a model which assigns indirect costs combined with direct costs to assess the true cost of receiving, storing, and transporting products in specific categories. ABC is the foundation to strong KPIs, efficient warehouse management, and understanding an operation’s true cost. Using ABC allows for a distribution center to charge customers for the actual cost and not a product value-based “tax.” ABC is activity-based management with a phased-in approach that requires support for the change from the top of the organization to the bottom. There are four basic phases to ABC, including overview and discovery, implementation, customization, and operational equipping. ABC is a key part of supply chain capacity development and holds many benefits, including identifying individual products that are wasteful, understanding the true cost of goods to inform pricing and purchase policy, and driving operational proficiency.