The production cost of lumber is a key factor when determining the price of logs at a sawmill gate. Some of the production costs are also manageable elements in price setting. There is a lack of exact knowledge of how the costs really act when some factor of production varies. This study introduces an activity-based costing (ABC) method for a large-scale sawmill that produces approximately 200,000 m³ of sawn lumber annually. Production processes were identified and their cost structures were analyzed in detail. The identified processes were log receiving, unloading and log sorting, log debarking, sawing and edging, green sorting and stickering, drying, quality sorting, and packing and storing with shipping. Resources, activities, and cost drivers were defined for each process. Sensitivity and applicability of the costing model were analyzed with two case studies in a virtual sawmill. Results indicate that the sawing pattern is an important variable in the production cost formation: a 16 percent decrement in the volume of sawn lumber led to a 4.5 percent cost reduction with the same log distribution. The findings of this study support the ABC method being a useful tool in controlling cost at a sawmill and a cost structure of a sawmill having an effect on the logistic chain of timber procurement.