What is activity-based costing?

Ø Activity-based costing (ABC) is a costing method that assigns overhead and

indirect costs to related products and services.
Ø This accounting method of costing recognizes the relationship between costs,
overhead activities, and manufactured products, assigning indirect costs to
products less arbitrarily than traditional costing methods.
Ø Activity-based costing (ABC) is mostly used in the manufacturing industry since it
enhances the reliability of cost data, hence producing nearly true costs and
better classifying the costs incurred by the company during its production
process.

What Is a Cost Center?

Ø A cost center is a department or function within an organization that does not
directly add to profit but still costs the organization money to operate.
Ø Cost centers only contribute to a company's profitability indirectly, unlike a profit
center, which contributes to profitability directly through its actions.
Ø Managers of cost centers, such as human resources and accounting departments
are responsible for keeping their costs in line or below budget.

What is Profit Centre?

Ø Profit center is a business unit or department within an organization that
generates revenues and profits or losses.
Ø Management closely monitors the results of profit centers, since these entities
are the key drivers of the total results of the parent entity.
Ø Profit center is a part of a business which is expected to make an identifiable
contribution to the organization's profits.