With activity-based costing (ABC), some production costs can be excluded from the product cost.
ABC is a costing method that assigns fixed costs to products based on the activities required to produce them. This differs from traditional costing methods in which overhead is allocated based on a single predetermined cost factor such as direct labor hours or machine hours.
Under ABC, manufacturing costs are allocated to specific activities, such as setting up a machine or processing a purchase order. These costs are then allocated to products based on the activities required by the product. This approach allows for a more accurate calculation of product costs and a better understanding of the costs associated with each activity. However, with ABC, some production costs can be excluded from the product cost. For example, general plant costs such as rent, supplies, and equipment maintenance cannot be attributed to specific operations and cannot be directly traced to specific products. In this case, these costs can be treated as period costs and included in expenses in the period in which they are incurred, rather than included in product costs.