What is Activity-Based Costing (ABC)?
Activity-based costing allocates overhead and indirect costs to products or services based on the activities they consume, rather than spreading them by volume or labor hours. It gives a more accurate picture of true product profitability.
How It Works
- Identify key activities and their cost pools.
- Pick cost drivers (machine hours, orders, batches).
- Assign costs to products based on driver usage.
Saudi Context
Saudi manufacturers and 3PL providers use ABC to price contracts under ZATCA transfer-pricing scrutiny and to identify unprofitable products in diversified portfolios.
Example
A Saudi printing firm finds that small custom jobs absorb 60% of setup costs but contribute only 20% of revenue — ABC reveals these jobs are unprofitable.