What is analyzed using activity-based costing?

Activity-based costing (ABC) focuses specifically on identifying and analyzing the costs of each primary activity within a company. This approach allows organizations to get a more accurate representation of their expenses associated with producing goods or services by assigning costs to activities based on their use of resources.

By breaking down costs per activity, businesses gain insights into which activities are cost-effective and which may be unnecessarily excessive. This detailed analysis supports more informed decision-making regarding pricing, budgeting, and resource allocation.

Understanding the costs of primary activities is crucial for optimizing operations and improving profit margins, as it ties directly to how value is created in the organization. Thus, this method enhances the management's ability to analyze profitability specific to products or services by connecting costs to the activities that incur them.