Overhead Cost Allocation in Manufacturing Firms Using Activity Based Costing Methodology

Abstract

Setting a fair way to allocate overhead costs across products is critical for any factory that wants a healthy bottom line, yet traditional costing systems still overlook the clutter on modern production floors. This article examines Activity-Based Costing-ABC-as a fresh alternative managers can use in place of those tired methods. The ABC framework first identifies each cost driver, then ties indirect expenses to the actual resources every item consumes, making the flow of money easier to trace and giving supervisors a clearer picture. To check its value, we pitted ABC against the standard method using financial records from a group of mid-size plants. The comparison revealed that ABC improves costing accuracy and steers smarter decisions by exposing waste and hidden giveaways the old model kept hidden. We conclude by summarizing the daily benefits and real dollars factories gain when they switch, along with practical steps any shop floor can take to adopt ABC quickly.