How to Categorize Expenses

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Activity-based costing (ABC)

Your company may use activity-based costing (ABC) to allocate costs. Activity-based costing allows companies to more precisely identify overhead costs associated with producing revenue. Instead of allocating overhead costs to products based on broad measures such as revenue or production volume, ABC starts with the cost of resources, allocates these costs to activities, and then allocates the cost of activities to products. Activities may be broadly defined (such as managing purchasing) or narrowly defined (such as managing purchasing for research and development). Maintaining an ABC system requires managers and employees to maintain detailed information about how much of their time is devoted to particular activities.

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