The theme of this book is that managers’ decisions drive an organization’s costs. To manage costs, managers and employees must understand how those decisions affect the efficiency of work being accomplished.

Activity-based costing traces the costs of resources to activities, which are the basic elements of an organization’s work. By learning what activities the organization uses to produce goods and services, managers can trace the organization’s costs to the products via the activities performed. We trace these costs using these steps:

1. Identify and classify the activities related to the company’s products.

2. Estimate the cost of the activities identified in step 1.

3. Calculate a cost-driver rate for each activity.

4. Assign activity costs to products.