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This paper aims to explore the theoretical foundations of Activity-Based Costing (ABC) by examining its underlying assumptions, key concepts, methodology, applications and future directions. ABC emerged as an innovative approach to address limitations in traditional costing methods by assigning overhead costs based on activities and cost drivers. The paper at first discusses ABC’s assumption that products consume activities, and activities consume resources. Key concepts of activities, cost drivers and cost pools are then defined. The methodology of how ABC traces costs from activities to cost objects is outlined. Applications across industries are reviewed and benefits of more accurate product costing is discussed. Challenges in implementation like extensive data requirements are acknowledged. Emerging trends integrating ABC with technologies like real-time costing, analytics and artificial intelligence are also examined. The paper argues that understanding ABC’s theoretical foundations is essential for effective organizational adoption and optimization of its strategic decision-support capabilities. Continuous refinement will strengthen ABC’s relevance in the evolving business landscape.
Muhammad Saleem Ullah Khan (Mon,) studied this question.