What is Activity-Based Costing

New Public Management (NPM) is a global paradigm that affects all public sectors, health included. Following the course of NPM reforms, Portuguese hospitals adopted a more business-oriented approach. Among various transformations hospitals have been through, the way they are financed changed from a retrospective finance system, based on a budget determined by the previous year’s costs, to “contratos-programa” that are established between each hospital, the provider, and Central Administration of the Health System (ACSS), the financier. Once these “contrato-programa” are based in prices per production lines, it is extremely important to have an effective cost system that can calculate accurate costs for each production line. With this purpose, in 2007 a pilot project was initiated to replace the existing and mandatory cost department method by Activity-Based Costing (ABC) method. In this chapter, the authors analyze the changes performed in the Portuguese hospitals by NPM movement and the role that traditional (cost department) and ABC methods play in it.